Cryptocurrency Adoption in Emerging Markets Can Threaten Financial Stability, Says IMF

Bitcoin and other crypto have soared in price and popularity, with emerging market economies such as Vietnam, India, and Pakistan seeing rapid growth.

By Reuters | Updated: 2 October 2021 11:20 IST

Cryptocurrency Adoption in Emerging Markets Can Threaten Financial Stability, Says IMF

Highlights

Bitcoin and its kin have in the last year soared in price and popularity
Backers say digital tokens such as stablecoins could help protect savings
El Salvador is the first country to adopt bitcoin as legal tender

The advent of digital currencies in emerging markets could spark "cryptoization" of local economies, potentially undermining exchange and capital controls and upsetting financial stability, the International Monetary Fund said on Friday.

Bitcoin and its kin have in the last year soared in price and popularity, with emerging and developing market economies such as Vietnam, India and Pakistan seeing rapid growth in some measures of adoption, according to US blockchain researcher Chainalysis.

Cryptocurrencies offer, in theory, a cheaper and quicker way of sending money across borders. Backers say digital tokens such as stablecoins could also help protect savings from high inflation or fluctuations in local currencies.

Samsung Wins Patent for a Tri-Fold Smartphone With Specialised Barrier Layer for Improved Durability

In September, El Salvador became the first country in the world to adopt bitcoin as legal tender, with backers tipping the experiment to lower costs for billions of dollars of remittances sent to the Central American nation.

The IMF said that unsound macroeconomic policies and inefficient payment systems are among the drivers of cryptocurrency adoption in emerging economies, along with the lure of quick gains that has also excited investors across the world.

But the IMF said the exact level of adoption of crypto in emerging economies was hard to gauge accurately.

Bitcoin Price Highest in Nearly Two Weeks

Factors such as low credibility of central banks and weak domestic banking systems that can fuel "dollarization" can also contribute to growing crypto use, the Fund added.

Dollarization is where a foreign currency - typically the U.S. currency - is used in addition to, or instead of, a domestic currency. High inflation or the instability of a domestic currency are among the drivers of the process.

Wide adoption of stablecoins - digital tokens designed to hold a steady value and seen as useful for savings and commerce - could also pose significant challenges by reinforcing existing dollarization forces, the IMF said.

Equity Capitalist Orlando Bravo Foresees Shining Future for Crypto

"Dollarization can impede central banks' effective implementation of monetary policy and lead to financial stability risks through currency mismatches on the balance sheets of banks, firms, and households," it said.

"Cryptoization" could also become a threat to fiscal policy, with digital assets possibly facilitating tax evasion, the IMF added.

The fund urged developing nations to strengthen macroeconomic policies and consider the possible benefits from issuing central bank digital currencies as a response to the rise of crypto.

Interested in cryptocurrency? We discuss all things crypto with WazirX CEO Nischal Shetty and WeekendInvesting founder Alok Jain on Orbital, the Gadgets 360 podcast. Orbital is available on Apple Podcasts, Google Podcasts, Spotify, Amazon Music and wherever you get your podcasts.

Affiliate links may be automatically generated - see our ethics statement for details.

Cryptocurrency Prices across Indian exchanges

Comments

For the latest tech news and reviews, follow Gadgets 360 on X, Facebook, WhatsApp, Threads and Google News. For the latest videos on gadgets and tech, subscribe to our YouTube channel. If you want to know everything about top influencers, follow our in-house Who'sThat360 on Instagram and YouTube.