Adopting cryptocurrency may threaten financial stability in the emerging market, says IMF
The International Monetary Fund said on Friday that the advent of digital currency in digital markets can give rise to the “cryptocurrency” of local economies, potentially damaging exchange and capital controls and worries financial stability.
Bitcoin and its relatives have grown in value and popularity over the past year, with emerging trends emerging in emerging market economies such as Vietnam, India, and Pakistan, US blockchain researcher Chainalysis according to.
Cryptocurrencies offer, in theory, an inexpensive and fast way to send money across borders. Predators say digital tokens such as stabilized coins can also help protect savings from high inflation or fluctuations in local currencies.
In September, El Salvador became the first country in the world to adopt Bitcoin as a legal tender, sending donors billions of dollars in remittances to the Central American nation to spend less on helping veterans.
The IMF has said that wrong economic policies and poor payment systems are among the drivers of cryptocurrency adoption in emerging economies, with the lure of fast gains which has also excited investors around the world.
But the IMF said it was difficult to find the right level of cryptocurrency adoption in emerging economies.
Funds have been added such as low reliance on central banks and weak domestic banking systems that can fuel “depolarization” and also help in the use of cryptocurrencies, the fund added.
Depolarization is where a foreign currency – usually a US currency – is used in addition, or instead, a foreign currency. Drivers of high inflation or foreign currency volatility are among the drivers.
The IMF says broad adoption of stable coins – digital tokens designed to keep a stable price and have been seen as useful for saving and trading – can also pose significant challenges by strengthening existing depolarization forces.
“Delegation can hamper the effective implementation of the central bank’s monetary policy and give rise to the risk of financial stability through currency imbalances on banks, firms, and households’ balance sheets,” he said.
IFW added that “cryptocurrency” can also be a threat to monetary policy, as digital assets are potentially facilitating tax evasion.
The Fund emphasized on developing nations to strengthen macroeconomic policies and that the Central Bank should consider the possible benefits of issuing digital currency as a response to the rise of crypto.