Bulletin
Investor Alert

London Markets Open in:

Oct. 3, 2021, 12:45 p.m. EDT

IMF warns ‘cryptoization’ of emerging economies could threaten growth, financial stability

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    Bitcoin USD (BTCUSD)
  • X
    Ethereum USD (ETHUSD)

or Cancel Already have a watchlist? Log In

Chris Matthews

The International Monetary Fund is warning that the growing popularity of cryptocurrency in emerging market economies poses a threat to their government’s ability to implement effective economic policy, while threatening financial stability in economies at every stage of development.

“Widespread and rapid adoption” of cryptocurrencies, like bitcoin /zigman2/quotes/31322028/realtime BTCUSD -2.98% and ether /zigman2/quotes/108573964/realtime ETHUSD -1.14% , in emerging markets “can pose significant challenges” when “residents start using crypto assets instead of the local currency,” IMF researchers Dimitris Drakopoulos, Fabio Natalucci and Evan Papageorgiou wrote in a blog post accompanying a new financial stability report on crypto assets, published Friday.

The IMF researchers point to survey data showing that “the top five countries using or owning crypto assets in 2020 were emerging markets and developing economies, whereas the lowest adopters were generally advanced economies.” Other data from blockchain analytics companies also shows that adoption in emerging markets of cryptocurrencies is outpacing that in the developed world.

Factors driving this “cryptoization” include unsound government economic policy that triggers inflation in local currencies as well as underdeveloped and inefficient payment mechanisms, according to the report. Though citizens in these emerging markets are making a rational decision to use cryptocurrencies that are more stable than local currencies and which can serve as more efficient payment mechanisms, cryptoization can also hinder local government’s ability to carry out better policies.

Widespread adoption of cryptocurrencies in emerging market economies “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,” the report reads. “This can be further amplified by liquidity risks, as central banks are not able to provide liquidity backstops in foreign units of account.”

The use of cryptocurrencies can also facilitate tax evasion, especially in countries where governments don’t have access to sophisticated blockchain analysis techniques that can be used to track down tax cheats, the report said.

Meanwhile, China’s recent crackdown on crypto mining within its borders has created an opportunity for such activity to migrate to other developing economies. This could pose a risk to the climate given that crypto creation involves high electricity usage and many emerging market economies rely on more carbon-intensive forms of energy and subsidize energy costs, Drakopoulos, Natalucci and Papageorgiou wrote.

The IMF called for greater international cooperation on cryptocurrency regulation to help promote global financial stability and called on emerging market economies to double their focus on effective macroeconomic policy.

“Authorities should prioritize strengthening macroeconomic policies and consider the benefits of issuing central bank digital currencies and improving payment systems,” the authors wrote. “Central bank digital currencies may help reduce cryptoization pressures if they help satisfy a need for better payment technologies.”

/zigman2/quotes/31322028/realtime
US : CoinDesk
56,529.88
-1,736 -2.98%
Volume: 0.00
Nov. 30, 2021 2:38a
loading...
/zigman2/quotes/108573964/realtime
US : Kraken
4,403.00
-50.80 -1.14%
Volume: 119.99M
Nov. 30, 2021 2:38a
loading...

This Story has 0 Comments
Be the first to comment
More News In
Economy & Politics

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.