IMF Warns Emerging Markets ‘Crypto’ Could Undermine Financial Stability

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The introduction of digital currencies in emerging markets could lead to the “cryptoization” of local economies and jeopardize their financial stability as cryptocurrencies gain ground in the country, according to the report Global Financial Stability Report released by the International Monetary Fund (IMF) on October 1.

Cryptocurrencies continue to attract new users and entire countries, with El Salvador being the first country in the world to adopt bitcoin as legal tender. However, as they point out from the IMF, in many cases the members of the cryptocurrency ecosystem lack “sound operations, governance and risk management practices”, so they are capable of causing disruptions. While the turmoil generated by its shortcomings has not had a significant impact on financial stability so far, the importance of its potential implications grows as cryptocurrencies become mainstream.

According to the IMF, the rapid and massive adoption of cryptocurrencies in new markets is capable of causing the ‘cryptoization’ of the economy, which is characterized by the use of digital currencies instead of the local currency. In some emerging markets and developing economies, ‘cryptoization’ may be further driven by poor central bank credibility, vulnerable banking systems and inefficient payment systems or limited access to financial services.

This, in turn, could undermine the ability of the country’s central bank to conduct monetary policy effectively and could create additional risks to financial stability. At the same time, it increases the risks for tax policy as cryptocurrencies facilitate tax evasion.

As recommended by the IMF, authorities should strengthen macroeconomic policies and assess the benefits of issue digital currencies of the Central Bank, as well as improving payment systems. In the event that new digital currencies help meet the need for improved payment technologies, the pressure of ‘crypto’ on the country’s financial stability could ease.

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