Economists at the International Monetary Fund (IMF) recently published a blog post on the website that challenges the development of Bitcoin as a legal tender. The blog did not mention El Salvador but illustrated that crypto-assets as national currencies might be a step in the wrong direction.
The blog was posted by IMF economists Tobias Adrian and Rhoda Weeks-Brown yesterday where they explained in detail the risks associated with Bitcoins as Legal Tender. Tobias Adrian is the financial counselor and director of the IMF’s monetary and capital markets department and Rhoda Weeks-Brown is the general counsel and director of the IMF’s legal department.
The two economists acknowledged the benefits that come with virtual currencies such as providing cheaper and faster payments, strengthening financial inclusion, and facilitating cross-border transactions.
However, making crypto assets as national currencies will require huge investments and difficult policy choices such as ‘clarifying the role of the public and private sectors in providing and regulating digital forms of money’.
Risks outweigh benefits
The article mentioned the volatility of crypto-assets such as Bitcoin which reached $65,000 before crashing down to less than half the aforementioned value. Ergo, cryptocurrencies are speculative assets that can bring considerable profits but also significant losses as well.
The blog explained that even if crypto-assets were to become legal tenders in an economy, it would be difficult for them to flourish in markets with stable inflation and exchange rates. They said:
“Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.”
The economists pointed out that while crypto assets are useful for unbanked people to make transactions, it is not beneficial to keep them as a store of value. They went on to explain the disadvantages of the widespread adoption of cryptocurrency. They said:
“If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.”
This widespread adoption can cause domestic prices to be highly unstable. Also, without any tight regulations, crypto-assets can be used for money laundering and terror financing risking a country’s financial integrity. Households and businesses could lose money through swings in values, frauds, and cyber-attacks.
Lastly, embracing cryptocurrencies as legal tender would encourage crypto mining, leading to the consumption of enormous amounts of electricity and unbalancing an economy’s ecological infrastructure.
In the end, the economists asked the governments to find a balance and offer benefits provided by crypto assets. They said:
“The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability.”