The IMF (International Monetary Fund) has, in several publications, issued anti- crypto adoption statements, decrying the lack of governance and regulation, and speculating that cryptocurrencies could create a parallel financial system as against CBDCs (Central Bank Digital Currencies).
As an international organization that supports economic policies that make for financial stability and ensure monetary cooperation of its 190 member countries, the IMF acknowledges the diverse opportunities in the crypto ecosystem.
However, it perceives some challenges posed by crypto, including the absence of operational or cyber resilience” among crypto asset providers, significant data gaps that impact financial integrity, and the tendency of emerging crypto assets to enhance dollarization risks.
Perceived Challenges of Crypto Adoption Over CBDCs
In one of the latest statements released June this year, the IMF highlighted the fall of FTX and the Terra Luna crash as urgent reasons for the creation of clear policies to protect investors and shield them from abuse.
Considering how investor enthusiasm hasn’t waned despite industry challenges, the international organization believes that robust safeguards can help contain the high risk of fraud and misconduct that could negatively impact investors’ return on investment. Their four major policy recommendations clearly capture their reservations about the increased crypto adoption over CBDCs.
Defending the Substitution of Sovereign Currencies
The IMF opines that defending countries’ sovereign currencies against crypto substitution will help maintain trustworthy, credible, and robust domestic institutions. In essence, clear, consistent, and transparent monetary policies are pivotal to tackling the challenges posed by cryptocurrencies.
“…Such assets, particularly stablecoins denominated in hard currencies, could potentially replace official currencies, and significantly impact countries’ monetary and fiscal policies. This is especially true in emerging markets and developing economies, underscoring the need for a comprehensive, consistent, and coordinated policy approach to crypto,” said the IMF.
Protecting National Sovereignty
To preserve national sovereignty, it is crucial not to allow crypto assets to become official currency or legal tender, according to the IMF.
Giving crypto assets legal tender status “would require accepting them in many jurisdictions for tax payments, fines and debt settlements, and could generate fiscal risks for government finances” which could in turn threaten financial stability or cause rapid inflation.
Addressing Crypto Volatility
The IMF expects policymakers to contain the volatility and increase financial stability by applying existing regimes and rules pertaining to capital flows to crypto service providers. That way, potential disruptions in capital flows can be minimized.
Transparency of Tax Policies
The IMF expects transparent treatment of tax policies related to crypto assets and for administrators to follow up on compliance with these policies. They call for unambiguous regulations – targeting crypto taxes such as value-added taxes or income/wealth levies.
Earlier in February, the IMF released a G20 Note on the Macrofinancial Implications of Crypto Assets, highlighting the potential costs and benefits of crypto assets to the larger economic sphere. It focused on stablecoins and unbacked crypto like Bitcoin and the significant implications of their wide adoption to macrofinancial stability.
While some of the IMF’s concerns may be valid, it’s important to note that the crypto space is relatively younger than the traditional financial system and its regulation would be on a developmental basis. In the last two years alone, two countries the Central African Republic and El-Salvador adopted Bitcoin as a legal tender, validating the IMF’s fears, and more countries may follow suit in the near future.