The global financial institution said in its “Global Financial Stability Report” released on Tuesday that cryptoization, which is the use of foreign or digital currency by a country, poses a significant threat to developing countries trying to boost the economy.
The IMF report found that cryptoization, like the recent introduction of Bitcoin as legal tender in El Salvador, could hamper the central bank’s efforts to formulate monetary policy, which could create liquidity risks and destabilize the economy.
Although El Salvador was not mentioned in the report, the IMF has repeatedly stated that the Central American country’s Bitcoin law has created “macroeconomic, financial and legal issues”.
The report highlights three “challenging transitions” for the global economy: the COVID-19 pandemic, climate change, and cryptocurrency. In recent months, the International Monetary Fund has expressed deep reservations about the influence of cryptocurrencies, despite its attempts to foster innovations that can help developing countries.
To avoid the risks of cryptoization, the report recommends that countries formulate policies that will help curb the growing demand for crypto, including strengthening monetary policy, maintaining central bank independence, and implementing “effective legal and regulatory measures to disincentivize foreign currency use.”
Additionally, the report recommends developing country governments consider central bank digital currency (CBDC), which can reduce cryptoization by meeting domestic demand for improved payment technology.
Stablecoins Also Seen As Threat to Economy
The report also identified the potential threats from stablecoins such as Tether and USDC to the global financial system and recommended a significant update to disclosure standards for stablecoin issuers, on par with those for commercial banks and money market funds, be used to ensure the stability of the stablecoin market. The booming $120 billion stablecoin industry is largely unregulated – something that has become a sore spot for regulators in the U.S. and globally.
The report also highlighted the risk of a run on stablecoin issuers, using the example of June’s panic selling that caused Iron Finance’s TITAN token to go to zero. According to the report, Runs may have greater systemic risk, including “triggering a sell-off of commercial paper.”