The International Monetary Fund writes: Crypto assets will pose significant risks to macro-financial stability and consumer protection

Source: International Monetary Fund (IMF) official website

Authors: Tobias Adrian, Financial Counselor and Director of the Monetary and Capital Markets Department at the IMF; Rhoda Weeks-Brown, General Counsel at the IMF

Emerging digital forms of currency have the potential to become more economical and faster payment methods, promote financial inclusion, enhance the resilience of payment service providers, and improve competition, facilitating cross-border remittances for individuals.

However, implementing this is not so simple. It requires substantial investment and difficult policy choices, such as clarifying the roles of the public and private sectors in the supply and regulation of digital forms of currency.

Some countries may be interested in taking a shortcut by adopting crypto assets as national currency. Indeed, many crypto assets are secure, easily accessible, and have low transaction costs. However, we believe that in most cases, the risks and costs outweigh the potential benefits.

Crypto assets are tokens issued by the private sector based on cryptographic technology, valued in their own units of account. Their value can be extremely volatile. For example, Bitcoin reached a peak value of $65,000 in April, but just two months later, its price had fallen below half that amount.

Yet, Bitcoin still exists. For some, Bitcoin offers an opportunity for anonymous transactions—whether good or bad. For others, Bitcoin provides a way to diversify their investment portfolio and hold speculative assets that can both create wealth and lead to significant losses.

Therefore, fundamentally, crypto assets are different from other types of digital currencies. For instance, central banks are considering issuing digital currencies—digital currencies issued in the form of central bank liabilities. Private enterprises are also advancing this frontier, creating currencies that can be sent via mobile phones (popular in East Africa and China) and stablecoins (whose value depends on the safety and liquidity of underlying assets).

Should Crypto Assets Be Used as Legal Tender?

Bitcoin and most similar cryptocurrencies remain on the fringes of finance and payments, but some countries are actively considering granting legal tender status to crypto assets, even making them a second (or sole) national currency.

If a crypto asset is granted legal tender status, creditors must accept the use of that crypto asset to fulfill monetary debts (including taxes), treating it as equivalent to banknotes and coins issued by the central bank (i.e., "currency").

Countries could even go further by legislating to encourage the use of crypto assets as national currency, making them an official unit of currency (which can be used to represent monetary debts) and a mandatory means of payment in everyday transactions.

In countries with stable inflation and exchange rates and reliable institutions, it is unlikely that crypto assets will gain widespread acceptance. Households and businesses have little incentive to price or save in a crypto asset that runs parallel to currency (like Bitcoin), even if it is granted legal tender or currency status. Their value is too unstable and disconnected from the real economy.

Even in relatively unstable economies, using globally recognized reserve currencies like the dollar or euro is likely to be more attractive than using a crypto asset.

Crypto assets may become a popular payment tool among those without access to banking services, but they will not be used to store value. Once individuals receive crypto assets, they will immediately convert them into real currency.

That said, real currency may not always be readily available or easily transferable. Additionally, some countries' laws prohibit or restrict payments in other forms of currency. These factors may make people more inclined to use crypto assets widely.

Proceed with Caution

If crypto assets (like Bitcoin) are widely used, the most immediate impact would be to undermine macroeconomic stability. If goods and services are priced in both real currency and crypto assets, households and businesses will spend significant time and resources deciding which currency to hold instead of engaging in productive activities. Similarly, if taxes are priced in crypto assets while expenditures are still primarily priced in local currency, the government's fiscal revenue will face exchange rate risks; the opposite is also true.

Moreover, monetary policy may lose its effectiveness. Central banks cannot set interest rates for foreign currencies. Typically, if a country adopts a foreign currency as its national currency, it also "imports" the credibility of foreign monetary policy, which hopes to align its economy (and interest rates) with foreign economic cycles. Both of these objectives become impossible in the widespread adoption of crypto assets.

As a result, domestic prices may become extremely volatile. Even if all prices are denominated in crypto assets like Bitcoin, the prices of imported goods and services will still fluctuate significantly with unpredictable market valuations.

Financial integrity may also be compromised. Without strong anti-money laundering and counter-terrorism financing measures, crypto assets could be used for money laundering, financing terrorism, and tax evasion. This would pose risks to a country's financial system, fiscal balance, foreign relations, and agency relationships.

The Financial Action Task Force has established a set of standards for regulating virtual assets and related service providers to mitigate financial integrity risks. However, these standards have not yet been uniformly implemented across countries, which could pose problems given the potential for cross-border activities.

This could further raise legal issues. Legal tender status requires that the relevant payment means be widely accessible. However, in many countries, the internet access and technology needed to transfer crypto assets remain scarce, raising questions about fairness and financial inclusion. Furthermore, the value of an official currency unit must be sufficiently stable to promote its use in medium- to long-term monetary debts. Changing legal tender status and currency units typically requires complex and extensive amendments to monetary laws to avoid legal disconnection.

In addition, banks and other financial institutions may be affected by the significant price volatility of crypto assets. If cryptocurrencies like Bitcoin gain legal tender status, it remains unclear whether prudent regulation of banks' foreign currency or risk asset exposures can still be maintained.

Moreover, the widespread use of crypto assets would undermine consumer protection. Households and businesses could lose wealth due to significant value fluctuations, fraud, or cyberattacks. While the underlying technology of crypto assets has proven to be very robust, technical failures can still occur. In the case of Bitcoin, it is difficult to exercise recourse due to the absence of a statutory issuer.

Finally, mining crypto assets (like Bitcoin) requires substantial electricity to power the computer networks that validate transactions. Adopting these crypto assets as national currency could have dire ecological impacts.

Seeking Balance

As national currency, crypto assets (including Bitcoin) would pose significant risks to macro-financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technology, including the potential to lower the cost of financial services and enhance financial service inclusivity, should not be overlooked. However, governments must intensify their efforts to provide these services while ensuring stability, efficiency, equity, and environmental sustainability, and leverage emerging digital forms of currency. Attempting to adopt crypto assets as national currency is not a desirable "shortcut."