The International Monetary Fund has called on nations to consider using blockchain tech to improve financial services, but warned that dabbling with private cryptocurrencies is vastly risky.
A Monday post titled Cryptoassets as National Currency? A Step Too Far opens by stating "New digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers."
But the post notes that some nations are considering they could access those benefits with the shortcut of adopting cryptoassets as either legal tender, or even "a second (or potentially only) national currency".
That way, argue Tobias Adrian and Rhoda Weeks-Brown, respectively the director of the IMF's Monetary and Capital Markets Department and general counsel and director of the IMF's Legal Department, lies madness.
Cryptocurrency volatility is the authors' main worry.
"Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions," the authors argue. "Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy."
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That volatility complicates markets, rather than improving them.
"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."
That potential mismatch damages macroeconomic stability, the authors argue.
Nor do cryptocurrencies solve the problems that see some nations adopt foreign currencies as legal tender.
"Usually, when a country adopts a foreign currency as its own, it 'imports' the credibility of the foreign monetary policy and hopes to bring its economy – and interest rates – in line with the foreign business cycle," the post argues. "Neither of these is possible in the case of widespread cryptoasset adoption."
The distributed nature of Bitcoin also worries the authors, as it means there's nobody to hold to account for security incidents or big swings in value.
The post concludes that blockchain-powered currencies issued by central banks may deliver the "cheaper and more inclusive financial services" that private cryptocurrencies promise.
"Governments, however, need to step up to provide these services, and leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability," the post ends. "Attempting to make cryptoassets a national currency is an inadvisable shortcut." ®