Crypto could replace domestic dollars in growing countries: IMF

Cryptocurrencies could stand alongside domestic currencies and supplant the use of US dollars across emerging countries, the International Monetary Fund has predicted while warning it could pose risks to ability of governments and central banks to run economic policy.

In a new report, the fund said the issue of “cryptoization” was growing in importance as more people invested in cryptocurrencies, presenting challenges to the global financial system.

Crypto currencies could supplant domestic currencies, the International Monetary Fund has warned.Credit:iStock

The rise of cryptocurrencies, aided in part by the collapse in global interest rates, has prompted concern among international financial and prudential regulators. There are also concerns from law enforcement agencies around cryptos given their increasing use by organised criminals to avoid monetary transfer systems.

The IMF said there were both risks and rewards around cryptos, including a broadening of the overall financial system and delivering services to people who may be excluded by traditional chains of cash and credit.

One emerging issue is cryptoization, whereby a country might see its residents use cryptocurrencies rather than the domestic fiat currency. It’s similar to dollarisation, where residents of a nation use the US dollar for ordinary transactions rather than their own currency.

It said just having strong macroeconomic policies may not be enough to prevent a mass movement of a country’s residents to cryptocurrencies.

“Crypto assets on their own do not change the economic forces that lead to the international use of currencies or increased dollarisation,” it found.

“Yet the technological advance of the crypto ecosystem, and especially stablecoins, could reinforce the incentives behind currency and asset substitution and ease adoption. Hence, the tolerance for policy missteps is greatly reduced.

“Countries that want to fend off dollarisation will need to strengthen monetary policy credibility, safeguard the independence of central banks, and maintain a sound fiscal position along with effective legal and regulatory measures to disincentivise foreign currency use.”

The IMF said there were challenges posed by cryptocurrencies, including financial integrity, investor protection and inadequate reserves.

The economic impact of crypto mining and concerns over crypto reserves were also highlighted by the IMF.Credit:Bloomberg

They can also be a drain on the broader economy. Bitcoin mining last year was estimated to use 0.36 per cent of global electricity, about the same as Belgium or Chile.

“Financial stability risks are not yet systemic, but risks should be closely monitored given the global
implications and the inadequate operational and regulatory frameworks in most jurisdictions,” it said.

But there could be benefits from cryptocurrencies, including increased financial inclusion, especially in emerging countries.

The IMF said policymakers needed to introduce global standards around crypto assets that would boost their ability to monitor the entire emerging system.

There may also be a case for central banks themselves to offer cryptocurrencies. This would help reduce demand for private sector cryptos and foreign currencies.

Determining who is using cryptocurrencies remains difficult.

The IMF said surveys of unique visitors to particular crypto exchange websites show much interest from people in emerging countries. Among people visiting the Binance website, the most were from Turkey while there was a high representation from Brazil and Argentina.

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