What part of Bitcoin as national currency is a ‘step too far’

What part of Bitcoin as national currency is a ‘step too far’

Since El Salvador’s president made the announcement to make Bitcoin legal tender in the country, equal amounts of praise and criticism have been thrown its way. Even as crypto enthusiasts have repeatedly referred to it as a revolutionary move, many experts have pointed out the negative consequences such a move could have. Now, the International Monetary Fund (IMF) has given out an official warning, albeit not directly to the nation, of the “dire consequences” that a country adopting Bitcoin as a legal currency could have.

In a blog post titled “Cryptoassets as national currency a step too far” on Monday, IMF marketing department financial counsellor and director Tobias Adrian and legal department general counsel and director Rhoda Weeks-Brown highlighted how even if Bitcoin might look like a lucrative alternative to countries with unstable economies and exchange rates, it could significantly impact the economy as a whole. Noting that while many cryptocurrencies are “indeed secure, easy to access, and cheap to transact”, the potential risks far outweigh the benefits. The blog further read,

“A crypto-asset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.”

So what are the potential economic concerns that granting crypto-assets legal tender status could bring? According to the two IMF officials, the most direct cost would be macroeconomic instability due to the usage of two different currencies with varying values. The said,

“If goods and services were priced in both a real currency and a crypto-asset, 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 crypto-asset while expenditures remained mostly in the local currency, or vice versa.”

They further mentioned how the monetary policy itself would suffer as central banks can’t set interest rates on a foreign currency. This means that such a move could lessen the credibility of foreign monetary policy as countries usually align their own economy and interest rates with the adopted foreign currency, which is not possible in the case of BTC.

More importantly, this would cause massive price fluctuations in imported goods and services as crypto assets are prone to volatility. Several legal issues were also outlined by Adrian and Weeks-Brown, who said that it could greatly affect the financial integrity of the country. They further added:

“Without robust anti-money laundering and combating the financing of terrorism measures, crypto-assets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.”

Another potential legal issue could be the unequal access to the currency that several residents could have due to the requirement of electricity and internet access to make use of Bitcoin. This raises “issues about fairness and financial inclusion.” Further, changes to the monetary law of the country would also be required to undergo “complex and widespread changes” in order to avoid future troubles in the monetary and legal systems.

Lastly, the blog post warned that consumer protection could be undermined in the event of large swings in value, fraud, or cyber-attacks.

As mentioned earlier, while El Salvador was not directly called out in the post, it is the only nation as of now that has decided to grant BTC legal tender status, which is slated to officially start functioning in September. However, the small nation of the Marshall Islands, whose economy was devastated by the pandemic, is planning to grant legal tender status to a digital sovereign currency.

An IMF representative had earlier said that this could “raise risks to macroeconomic and financial stability as well as financial integrity” of the islands.

Subscribe to our Newsletter