Bitcoin as a national currency? Bad idea, says IMF

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The International Monetary Fund (IMF) has warned countries against digital currency plans if they consider using cryptocurrencies like Bitcoin as their national currency.

The IMF blog, published on Monday, does not name any country or region, but many countries, including China, Japan, the United States, Australia, Canada and the United Kingdom, have explored various implementations of currencies. digital documents issued by their respective central banks. CBDC or digital sovereign currencies.

The European Central Bank (ECB) this month announced plans to prepare for a digital euro, a sovereign digital currency issued by the ECB that would complement cash and support digital payments in light of changes in transactions since the pandemic.

El Salvador made headlines in June by becoming the first country to make Bitcoin legal tender, as has been widely reported.

But El Salvador’s move is very different from the ECB’s potential digital euro and the IMF blog written by staff Tobias Adrian, financial adviser and director of the IMF’s Monetary and Capital Markets Department, and Rhoda Weeks- Brown, general adviser and director of the IMF The legal department is warning other countries against a similar move. A big problem is Bitcoin’s price volatility.

The blog adds to what IMF communications director Jerry Rice said in June, ahead of his meeting with Salvadoran President Nayib Bukele: that “the country’s adoption of bitcoin as legal tender raises a certain number of macroeconomic, financial and legal issues that require very careful analysis. . “

While Adrian and Weeks-Brown recognize the benefits of sovereign digital currencies for faster payments, financial inclusion, and cross-border transfers, they oppose countries taking a “shortcut” to activate digital currencies.

“This requires significant investments as well as difficult policy choices, such as clarifying the role of the public and private sectors in the provision and regulation of digital forms of currency,” they write.

“Some countries may be tempted by a shortcut: adopt crypto-assets as national currencies. Many are indeed secure, easy to access and inexpensive to process. We believe, however, that in most cases the risks and costs outweigh the potential benefits.

The main concern is that the value of cryptocurrencies like Bitcoin can be “extremely volatile”. For example, it peaked in April at $ 65,000, then collapsed to less than half soon after. While Bitcoin survives on individuals and investors willing to bet on its future value, the risks to the nation and its central bank of using it as legal tender are different.

“Cryptoassets are therefore fundamentally different from other types of digital currency,” they write.

They outline the risks for countries considering adopting Bitcoin and other cryptocurrencies as legal tender.

“Cryptoassets are unlikely to spread in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel crypto-asset such as Bitcoin, even if it had legal tender or currency status. . Their value is just too volatile and unrelated to the real economy. “

There’s a reason not many people buy anything with Bitcoin except maybe to pay ransomware gangs.

“Bitcoin and its peers have mostly remained on the sidelines of finance and payments, but some countries are actively considering making crypto-assets legal, and even making a second (or potentially just one). national currency “, they write.

“If a crypto-asset were legal tender, it would have to be accepted by creditors as payment for monetary obligations, including taxes, similar to notes and coins (money) issued by the central bank.”

“Countries can even go further by passing laws to encourage the use of crypto-assets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed) and as a means of compulsory payment for daily purchases. “

The greater risk of “the widespread adoption of a crypto-asset such as Bitcoin is for macroeconomic stability,” they note.

For example, the most powerful central bank levers setting interest rates and controlling the money supply would lose weight, much like when a country adopts a foreign currency like the US dollar.

The country then “” imports “the credibility of foreign monetary policy and hopes to align its economy and interest rates with the foreign business cycle. None of these things are possible in the case of widespread adoption of crypto. active “.

And that would mean that the prices for residents could also fluctuate wildly due to the price of imports.

“As a result, domestic prices could become very volatile. Even if all prices were quoted, for example, in Bitcoin, the prices of imported goods and services would continue to fluctuate massively, depending on the whims of market valuations,” they note. .

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