Bitcoin as your national currency? Bad idea, says the IMF
The International Monetary Fund (IMF) has warned countries against digital currency plans if they're planning to use cryptocurrencies like Bitcoin as national currency.
The IMF's blogpost, published on Monday, doesn't name any country or region, but many countries, including China, Japan, the US, Australia, Canada and the UK, have been exploring various implementations of digital currencies issued by their respective central banks — CBDCs 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 in June made headlines by becoming the first country to make Bitcoin legal tender, as widely reported.
But El Salvador's move is wildly different from the ECB's potential digital Euro and the IMF's blog — written by its staff Tobias Adrian, financial counsellor and director of the IMF's Monetary and Capital Markets Department, and Rhoda Weeks-Brown, general counsel and director of the IMF's Legal Department — warns other countries against a similar move. One big issue is Bitcoin's price volatility.
The blog adds to what IMF director of communications Jerry Rice said in June, ahead of meeting with El Salvador's president Nayib Bukele: that the nation's "adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis."
While Adrian and Weeks-Brown acknowledge the benefits of sovereign digital currencies for faster payments, financial inclusion and cross-border transfers, they take exception with countries taking a "shortcut" to enabling digital currencies.
"It requires significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money," they write.
"Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits."
The chief concern is that the value of cryptocurrencies like Bitcoin can be "extremely volatile". For example, it peaked in April at $65,000 and then crashed to less than half shortly after. While Bitcoin survives thanks to individuals and investors willing to gamble on its future value, the risks to nation and its central bank of using it as legal tender are different.
Bitcoin mining 101
"Cryptoassets are thus fundamentally different from other kinds of digital money," they write.
They outline the risks to nations considering adopting Bitcoin and other cryptocurrencies as legal tender.
"Cryptoassets are unlikely to catch on 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 cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy."
There's a reason why few people buy anything with Bitcoin, except perhaps for paying off ransomware gangs.
"Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency," they write.
"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."
"Countries can even go further by passing laws to encourage the use of cryptoassets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases."
The greatest risk of "widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability," they note.
For example, central banks' most powerful levers — setting interest rates and controlling money supply — wold "lose bite", much in the same way as when a country adopts a foreign currency like the US dollar as its own.
The country then "'imports' the credibility of the foreign monetary policy and hope to bring its economy–and interest rates–in line with the foreign business cycle. Neither of these is possible in the case of widespread cryptoasset adoption."
And that would mean prices for residents could fluctuate wildly too because of the price of imports.
"As a result, 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 the whims of market valuations," they note.