The International Monetary Fund (IMF) warned that giving cryptocurrencies the status of legal tender or official currency could lead to adverse effects on the monetary sovereignty and stability of a nation.
The UN financial agency considers this to be the first of nine elements to create effective policies for crypto assets, according to a paper published Feb. 23 — titled “Elements of Effective Policies for Crypto Assets.”
The IMF said that granting cryptocurrencies the status of official currency or legal tender can also lead to financial stability issues as such a move would increase adoption and exposure of traditional financial institutions to these volatile assets — greatly heightening their risk profiles.
In cases where a state grants a cryptocurrency such a status, the IMF said the government should minimize its use for official payments and avoid guaranteeing crypto to fiat conversions to safeguard against volatility issues. It added that government revenues would be susceptible to high variation if quoted in crypto and operations are handled by state-owned enterprises.
The IMF said that a lack of credible domestic institutions and policies are the first line of defense when it comes to monetary stability of a nation and weakness here often leads to people converting their fiat for foreign currencies. This issue is further exacerbated by the advent of cryptocurrencies as people are now converting untrusted fiat into crypto more and more in comparison to other fiat currencies like the dollar or euro.
IMF surmises that the best way to reduce the substitution of fiat into crypto assets is by building stronger institutions and creating solid policies that enhance trust in the traditional system. Creating a solid Monetary Policy Framework (MPF) is the first step in ensuring credibility.
It added that the MPF should be transparent, coherent and consistent to ensure the public understands the policies and their impact.
The IMF said this will help “anchor market expectations, curb currency substitution, and ensure the effectiveness of monetary policy.”
The paper highlights eight other points sovereign nations and their central banks should consider for effective policy making and regulation of cryptocurrencies.
It urged countries to safeguard against excessive capital flow and manage capital flows appropriately via effective measures. The IMF said risks stemming from crypto assets should be analyzed regularly and taxation of such assets should be “unambiguous.”
The IMF also said that countries need to establish “legal certainty” around crypto assets and address the risks as needed in a proactive manner. Additionally, countries should establish a joint framework across agencies, as well as ensure timely and effective regulation of the sector.
The final three elements focus on enhancing global cooperation among regulators and sovereigns. The IMF said countries should also monitor how crypto assets are impacting other economies.
The IMF urged global collaboration in developing digital infrastructure and alternative solutions to improve cross border payments as this is one of the core areas where cryptocurrencies utility outperforms traditional financial solutions and fiat.