Cryptoassets as National Currency? A Step Too Far
IMF Blog, July 26, 2021
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- Authors: Tobias Adrian, Rhoda Weeks-Brown
- Published: July 26, 2021
Potential of new digital forms of money
- New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.
- Real-world implementations under consideration:
- Central bank digital currencies: digital money issued in the form of a liability of the central bank.
- Private mobile-money systems: money that can be sent over mobile phones, popular in East Africa and China.
- Stablecoins: private tokens whose value depends on the safety and liquidity of backing assets.
- Many cryptoassets are secure, easy to access, and cheap to transact, but realizing benefits requires significant investment and difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.
Cryptoassets defined and recent price example
- Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account.
- Their value can be extremely volatile. Example cited: Bitcoin reached a peak of $65,000 in April and crashed to less than half that value two months later.
Cryptoassets as legal tender or national currency
- Legal tender implication: if a cryptoasset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
- Going further: countries could pass laws to encourage use of cryptoassets as a national currency—an official monetary unit (in which monetary obligations can be expressed) and a mandatory means of payment for everyday purchases.
- Adoption likelihood by context:
- Unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions—households and businesses would have little incentive to price or save in a volatile cryptoasset even if given legal tender or currency status.
- In relatively less stable economies, globally recognized reserve currencies such as the dollar or euro would likely be more alluring than adopting a cryptoasset.
- Cryptoassets might be used as a vehicle for unbanked people to make payments, but not to store value—received cryptoassets would likely be immediately exchanged into real currency.
Macroeconomic and monetary risks
- Most direct cost of widespread cryptoasset adoption is to macroeconomic stability.
- If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold rather than engaging in productive activities.
- Government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.
- Monetary policy limitations:
- Central banks cannot set interest rates on a foreign currency.
- When a country adopts a foreign currency, it “imports” the credibility of the foreign monetary policy and hopes to align its economy–and interest rates–with the foreign business cycle. Neither outcome is possible with widespread cryptoasset adoption.
- Domestic prices could become highly unstable; even if all prices were quoted in, say, Bitcoin, the prices of imported goods and services would still fluctuate massively, following market valuations.
Financial integrity, legal, and operational risks
- Financial integrity:
- Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets 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.
- The Financial Action Task Force has set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks; enforcement of that standard is not yet consistent across countries.
- Legal issues:
- Legal tender status requires that a means of payment be widely accessible; internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion.
- The official monetary unit must be sufficiently stable in value to facilitate medium- to long-term monetary obligations.
- Changes to legal tender status and the monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.
- Prudential and consumer protection risks:
- Banks and financial institutions could be exposed to massive fluctuations in cryptoasset prices; it is unclear whether prudential regulation against exposures to foreign currency or risky assets could be upheld if Bitcoin were given legal tender status.
- Widespread cryptoasset use would undermine consumer protection—households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks.
- Technical robustness notwithstanding, technical glitches could occur and recourse is difficult where there is no legal issuer (example: Bitcoin).
- Environmental impact:
- Mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions; ecological implications of adopting these cryptoassets as a national currency could be dire.
Key findings and conclusions
- Cryptoassets—including Bitcoin—come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment.
- Advantages of underlying technologies—potential for cheaper and more inclusive financial services—should not be overlooked.
- Governments need to step up to provide digital financial services and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability.
- Attempting to make cryptoassets a national currency is characterized as an inadvisable shortcut.
IMF Blog: Tobias Adrian and Rhoda Weeks-Brown, July 26, 2021