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Emerging markets may fuel “cryptoisation” of local economies, threatening financial stability: International Monetary Fund (IMF)

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Cryptocurrencies offer, in theory, a cheap and fast way to send money across borders.

The International Monetary Fund said on Friday that the arrival of digital currencies in emerging markets could fuel the “cryptoisation” of local economies, potentially undermining exchange and capital controls and troubling financial stability.

According to American blockchain researcher Chainalysis, the price and popularity of bitcoin and other coins have increased over the past year with emerging and developing market economies such as Vietnam, India and Pakistan.

In theory, cryptocurrencies provide a cheap and fast way to send money across borders. Proponents say that digital tokens such as stablecoins can also help protect savings from high inflation or volatility in local currencies.

In September, El Salvador became the first country in the world to adopt bitcoin as legal tender, with backers tipping the experiment to lower the cost of billions of dollars in remittances sent to the Central American nation.

The IMF said that the drivers of cryptocurrency adoption in emerging economies are unbalanced macroeconomic policies and inefficient payment systems, as well as the lure of quick profits, has also excited investors around the world.

But the IMF said it was difficult to accurately gauge the exact level of crypto adoption in emerging economies.

The fund said factors such as the low credibility of central banks and a weak domestic banking system that could promote “dollarisation” could also contribute to the increased use of crypto.

Dollarization is where a foreign currency – typically US currency – is used in addition to or instead of a domestic currency. High inflation or the volatility of the domestic currency are among the drivers of the process.

The IMF said widespread adoption of stablecoins – digital tokens designed to hold a stable value and as useful for savings and commerce – could pose significant challenges by reinforcing existing dollarization forces.

“Dollarization can hinder the effective implementation of central banks’ monetary policy and create financial stability risks through currency mismatches on the balance sheets of banks, firms and households,” it said.

The IMF said “cryptocurrency” could also pose a threat to fiscal policy, with digital assets potentially facilitating tax evasion.

The fund urged developing countries to strengthen macroeconomic policies and consider the potential benefits from issuing central bank digital currency as a response to the rise of crypto.

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