IMF: 'Cryptocurrencies pose a threat to the global economy'

The adoption of cryptocurrencies as legal tender poses a risk to global financial stability. This is what the IMF writes in the latest edition of its semi-annual Global Stability Report. The organization warns that countries that accept Bitcoin are giving up their monetary sovereignty. As a result, central banks are less able to intervene in times of crisis, for example to provide liquidity to the market.

With this warning, the IMF is targeting El Salvador, the country that this summer was the first in the world to accept Bitcoin as legal tender. Yet she does not explicitly mention this country in her report. There are also voices in several South American countries to accept the virtual currency as a fully-fledged means of payment. This is not yet really concrete, but the experiment in El Salvador is being followed closely.

Digitization

It is more common for countries to start using a foreign currency. For example, the U.S. dollar is used worldwide by several countries that do not have a well-functioning currency of their own. It also sometimes happens that people in a certain country borrow a lot in foreign currency, for example because of a lower interest rate. When the use of dollars or euros becomes commonplace, it is also referred to as dollarization and euroization.

The IMF is now adding a new variant, namely cryptoisation. This term refers to countries that have accepted cryptocurrencies as legal tender. El Salvador is the first example of this. According to the IMF, in order to reduce the risk of cryptoization, countries should pursue policies that respect the independence of the central bank. Also, countries should improve their financial infrastructure to discourage the use of cryptocurrencies. Central bank digital money (CBDC) could play a role in this, according to the report.

Stablecoins

The IMF's report also mentions stablecoins like Tether and USD Coin. These could pose a threat to the global financial system. These virtual currencies, which are backed by dollars and therefore have a stable price, already have a size of $120 billion. According to the IMF, due to their size, these types of virtual currencies should be regulated in the same way as money market funds. The organization warns that a panic sale in these types of crypto coins could have a very disruptive effect.

Whether the IMF's criticisms are justified, only time will tell. However, these warnings are not unexpected. The IMF is part of the current monetary system based on the US dollar. When cryptocurrencies become a viable alternative to the dollar, it could have major consequences for the stability of the dollar system and the power of governments and central banks.

This contribution was made from Geotrendlines