The emergence of digital currencies in emerging markets could lead to cryptocurrencies in local economies, potentially undermining currency and capital controls and disrupting financial stability, the International Monetary Fund said on Friday.
Bitcoin and its kin have risen in price and popularity over the past year, with emerging and emerging economies such as Vietnam, India, and Pakistan seeing rapid growth in some adoption steps, according to US blockchain researcher Chainalysis.
In theory, cryptocurrencies offer a cheaper and faster way to send money across borders. Proponents say that digital tokens such as stable coins can also help protect savings from high inflation or local currency fluctuations.
In September, El Salvador became the first country in the world to accept Bitcoin as legal tender. Supporters suggest an attempt to cut the cost of billions of dollars in remittances from Central America.
The IMF said inadequate macroeconomic policies and inefficient payment systems, along with the lure of quick profits, were one of the drivers behind the adoption of cryptocurrencies in emerging markets, which have also attracted investors around the world.
However, the IMF said it is difficult to gauge the exact level of cryptocurrency adoption in emerging markets.
Factors such as low central bank authority and a weak domestic banking system that could trigger “dollarization” could also contribute to the increased use of cryptocurrencies, the fund added.
With dollarization, a foreign currency – usually the US currency – is used in addition to or in place of the local currency. High inflation or local currency volatility is one of the drivers of the process.
Widespread adoption of stable coins — digital tokens that maintain a stable value and are seen as useful for savings and trading — could also pose significant challenges in strengthening existing dollarization forces, the IMF said.
“The dollar could hinder the effective implementation of the central bank’s monetary policy and pose risks to financial stability through currency mismatches on the balance sheets of banks, companies and households,” the statement said.
Cryptocurrencies could also pose a threat to fiscal policy, as digital assets are likely to facilitate tax evasion, the IMF added.
The fund urges developing countries to strengthen macroeconomic policies and examine the potential benefits of issuing digital currencies to central banks in response to the cryptocurrency boom.