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The International Monetary Fund (IMF) cautioned that granting cryptocurrencies the status of official money or legal tender might have a negative impact on a country’s monetary sovereignty and stability.
According to a study titled “Elements of Effective Policies for Crypto Assets” that was issued on February 23, the UN finance agency views this as the first of nine components to develop successful policies for digital assets.
According to the IMF, making cryptocurrencies legal money or an official form of payment might potentially cause problems with financial stability since it would expand the use of and exposure of conventional financial institutions to these risky assets.
The IMF advised governments to limit the use of cryptocurrencies for official payments and to abstain from guaranteeing crypto-to-fiat exchange rates in order to protect against volatility problems. It also noted that if tax revenues were priced in cryptocurrencies and managed by state-owned businesses, they would be highly erratic.
According to the IMF, a country’s first line of defense for maintaining monetary stability is its domestic institutions and policies, and when these are lacking, individuals are more likely to exchange their fiat for foreign currencies. The emergence of cryptocurrencies has only made this problem worse, as individuals are increasingly substituting unreliable fiat for cryptocurrencies instead of fiat currencies like the dollar or the euro.
IMF believes that strengthening institutions and developing sound policies that increase trust in the established system are the best ways to lessen the replacement of fiat for crypto assets. The first stage in establishing credibility is developing a strong Monetary Policy Framework (MPF).
To guarantee that the public is aware of the policies and their effects, it was added that the MPF should be open, logical, and consistent.
This will contribute to “anchoring market expectations, preventing currency substitution, and ensuring the efficacy of monetary policy,” according to the IMF.
The study offers eight additional factors that sovereign states and their central banks should take into account when formulating cryptocurrency policy and regulation.
It advised nations to take precautions against an influx of money that is excessive and to manage capital flows effectively. According to the IMF, risks associated with crypto assets should be routinely assessed, and their taxes should be “unambiguous.”
The IMF added that nations must provide “legal clarity” surrounding crypto assets and take aggressive steps to resolve any concerns. Countries should also create a coordinated framework for all agencies and guarantee prompt and efficient sector regulation.
The final three components emphasize strengthening intergovernmental coordination between regulators and sovereigns. Countries should keep an eye on how crypto assets are affecting other economies, according to the IMF.
One of the key areas where cryptocurrencies outperform traditional financial solutions and fiat is cross-border payments, thus the IMF advocated international cooperation in establishing digital infrastructure and alternative solutions to increase cross-border payments.
