The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) and other central banks considering adoption of cryptocurrency to be cautious of its economic pitfalls.
According to the body, the adoption of a cryptocurrency by a country may render its monetary policy ineffective. CBN had, last week, reiterated plans to launch its digital currency on October 1, 2021. According to the apex bank, the digital currency initiative, which is tagged “Project GIANT,” would use the Hyperledger Fabric Blockchain.
However, IMF’s Financial Counsellor and Director of Monetary and Capital Markets Department, Tobias Adrian, in a blog published by the Fund, warned countries planning cryptocurrency adoption to “proceed with caution.” According to him, the most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability.
“If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.
“Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa,” he said. Adrian added that central banks could not set interest rates on a foreign currency.
“Usually, when a country adopts a foreign currency as its own, it ‘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. “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.
“Financial integrity could also suffer. Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism and evade taxes.
This could pose risks to a country’s financial system, fiscal balance and relationships with foreign countries and correspondent banks,” he said.
The IMF director noted that while the Financial Action Task Force had set a standard for how virtual assets and related service providers should be regulated to limit financial integrity risks, enforcement of that standard is not yet consistent across countries, which can be problematic, given the potential for cross-border activities.
“Legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer cryptoassets remains scarce in many countries, raising issues about fairness and financial inclusion.
“Moreover, the official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations.
And changes to a country’s legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system. “In addition, banks and other financial institutions could be exposed to the massive fluctuations in cryptoasset prices.
It is not clear whether prudential regulation against exposures to foreign currency or risky assets in banks could be upheld if Bitcoin, for instance, were given legal tender status,” he said.
He added that widespread cryptoasset use would undermine consumer protection as households and businesses could lose wealth through large swings in value, fraud or cyber-attacks.
“While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer,” he said.
The IMF director noted that cryptocurreccies as national currency come with substantial risks to macro-financial stability, financial integrity, consumer protection and the environment. “
The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked.