Cryptocurrencies not suitable as legal tender?

Cryptocurrencies such as Bitcoin are not suitable as legal tender. This is what economists Tobias Adrian and Rhoda Weeks-Brown wrote in a Opinion piece for the IMF. Due to the volatility of cryptocurrencies, it would be difficult to pay with them. In addition, countries give up their monetary sovereignty if they accept cryptocurrencies as legal tender. Countries should therefore be cautious about the acceptance of virtual currencies, the economists warn.

Bitcoin has been around for more than a decade now, but to date it does not pose a threat to the current money system. Still, it's making central banks and governments nervous, as the technology behind cryptocurrencies could revolutionize the way we pay. That is why central banks around the world are accelerating the development of their own digital currencies, the so-called 'Central Bank Digital Currencies'. Central bank digital money is intended to prevent people from using cryptocurrencies on a large scale as an alternative means of payment.

El Salvador

The discussion of central bank digital money versus cryptocurrencies is interesting, because they are two different visions of money. And in this, we also see two different camps emerging worldwide. On the one hand, there are countries that want to ban cryptocurrencies, on the other hand, there are also a number of countries that are embracing the technology. For example, El Salvador was the first country in the world to have Bitcoin accepted as legal tender. There are also several South American countries that are looking at cryptocurrencies with great interest.

Where digital central bank money is a step towards further centralization of our money system, cryptocurrencies are a step in the other direction. Digital central bank money means more control and financial repression, while cryptocurrencies are independent of central authorities. Anyone can use cryptocurrencies without anyone being able to control them. It doesn't discriminate and doesn't care about national borders, just like gold.

Volatility

It is therefore not surprising that an institution such as the IMF, as an extension of the dollar system, is not in favor of cryptocurrencies. In the opinion piece, the two economists point out the risks of embracing cryptocurrencies as a means of payment. It would cause economic instability, as prices in cryptocurrencies are volatile. It would also give free rein to criminals, because banks cannot control the money flows in cryptocurrencies.

However, the two economists are not all negative about cryptocurrencies. They also see benefits of cryptocurrencies, when scalability improves and there is an alternative to mining cryptocurrencies, which requires a lot of electricity. In that respect, central banks still have a lot of work to do, because developments in the field of cryptocurrencies are moving at lightning speed. For example, virtual currencies with a stable price (so-called stablecoins) have been around for some time and nowadays there are also crypto coins that can process many thousands of transactions per second.

In the coming years, there may be major shifts in the way we pay. With an increasingly digitizing economy, banks and central banks face more competition from fintech companies and cryptocurrencies. At the moment, it seems unthinkable that we will pay with virtual currencies, but that could change in the future.

This contribution was made from Geotrendlines

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