IMF warns that ‘cryptocurrency’ growth in emerging economies could be a threat to financial stability

The International Monetary Fund warns that the growing popularity of cryptocurrencies in emerging market economies threatens their government’s ability to implement effective economic policies, while the stability of the economy at every stage of development is threatened.

“Widespread and rapid adoption” of cryptocurrencies such as Bitcoin BTCUSD,
+ 2.41%
And ether ETHUSD,
+ 1.64%,
Growing markets could “pose significant challenges” when “residents start using crypto resources instead of local currencies,” IMF researchers Dimitris Dracopolos, Fabio Natalucci and Ivan Papaziorgio wrote in a blog post on Friday with a new financial stability report on crypto assets.

IMF researchers point to survey data that “the top five countries using or owning crypto resources in 2020 were emerging markets and developing economies, with the lowest recipients being advanced economies.” Other data from blockchain analysis firms also show that the adoption of cryptocurrencies in emerging markets is higher than in the developed world.

The reasons for this “cryptocurrency” are government economic policies that trigger inflation in local currencies as well as underdeveloped and inefficient payment mechanisms, the report said. While citizens of this emerging market are making a reasonable decision to use cryptocurrencies that are more stable than local currencies and which can serve as a more efficient payment system, cryptocurrency may hinder the ability of local governments to adopt better policies.

The widespread adoption of cryptocurrencies in emerging market economies “could hamper the effective implementation of the central bank’s monetary policy and risk financial stability through currency imbalances in the balance sheets of banks, institutions and households.” “This could be further exacerbated by the liquidity risk, as central banks are not able to provide liquidity backstops to foreign units of the account.”

The report says the use of cryptocurrencies could facilitate tax evasion, especially in countries where governments do not have sophisticated blockchain analysis techniques that can detect tax evasion.

Meanwhile, the crackdown within its borders on China’s recent crypto mining has created opportunities for such activity to shift to other developing economies. This could be a risk factor for the climate that involves high power consumption in the creation of crypto and many emerging market economies rely on more carbon-intensive forms of energy and subsidize energy costs, Dracopolus, Natalucci and Papazorgi also wrote.

The IMF has called for greater international cooperation in cryptocurrency regulation to help promote global financial stability, and called on emerging market economies to redouble their focus on effective macroeconomics.

“The authorities should prioritize strengthening macroeconomic policies and consider improving the central bank’s digital currency facility and payment system,” the authors wrote. “The central bank’s digital currency cryptocurrency can help ease the pressure if they help meet the need for better payment technology.”

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