- Use of foreign or digital currency by a country pose significant risks
- Adoption of bitcoin as legal tender will hamper central banks’ efforts to set monetary policy
- The report has also mentioned stablecoins like Tether and USDT as a threat to the global financial system
An International Monetary Fund (IMF) report has been released recently which talks about cryptocurrencies as a threat to the world. In the Semi-annual global financial stability report, the IMF explained that the adoption of cryptocurrency as the national currency carries significant risks and is an inadvisable shortcut.
As per the report, IMF is worried about the cryptoization of the developing world. In the report which was released this week, the global financial institution said that cryptoization- the use of foreign or digital currency by a country pose significant risks. It is not an advisable shortcut for developing countries trying to boost their economies.
Bitcoin adoption leads to liquidity risks
The report also highlighted the adoption of bitcoin as a legal tender by El Salvador. However, the report did not directly mention the name of the country. It said that El Salvador’s recent adoption of bitcoin as legal tender will hamper central banks’ efforts to set monetary policy. This will also pose a threat to liquidity risks and destabilize economies.
Bitcoin law poses challenges
The IMF has said that the Central American country’s bitcoin law poses macroeconomic, financial and legal challenges. The global economy is suffering from three challenges that need to be taken care of. These are the COVID-19 pandemic, climate change and cryptocurrencies. In recent months, the IMF has expressed concern about the impact of cryptocurrency, despite it tries to encourage innovation that can help the developing world.
To ward off the risk of cryptoization, the report says that the country needs to develop policies that could help reduce growing crypto demand and focus on strengthening monetary policy, safeguarding the independence of central banks and implementing effective, legal and regulatory measures to disincentivize foreign currency use.
Furthermore, the paper recommends that governments in underdeveloped countries investigate central bank digital currencies (CBDCs), which might help to minimise cryptoization by meeting domestic demand for better payment technology.
Stablecoins a threat
The report has also mentioned stablecoins like Tether and USDT as a threat to the global financial system. To ensure the stability of the stablecoin market, significant modifications to transparency rules for stablecoin issuers, on par with those for commercial banks and money market funds, should be employed. The $120 billion stablecoin sector is mostly unregulated, which has irritated regulators in the United States and around the world.