IMF Crypto stance: winds of change from Latin America?

IMF Crypto stance: winds of change from Latin America?

Subject :Economy

Section: Monetary policy

• Original position of IMF on crypto currencies:
  • IMF has maintained that crypto assets, and their adoption poses risk for financial and monetary stability of the economy.
  • On adoption of cryptocurrencies as a substitute for currency, as seen with some LatinAmerican countries such as El Salvador, the IMF noted that unregulated capital movement will pose challenges in taking any management measures by the government or the regulator.
  • In addition it noted fiscal risks and consumer protection issues that crypotos pose.
  • On El Salvador’s adoption of Bitcoin as official currency, IMF had urged the country to not grant “legal tender status” to Bitcoin.
• Importance of Latin America’s cryptocurrency market:
  • Countries like Argentina, Chile, and Columbia have experienced devaluation of their currency against the U.S. dollar.
  • To preserve the value of their savings, residents try to convert their funds to U.S. dollars. However, there are legal restrictions controlling this.
  • To circumvent this, people resorted to converting their assets to stablecoins – cryptocurrencies designed to reflect the value of fiat currencies such as the U.S dollar. (A “stablecoin” is a type of cryptocurrency whose value is pegged to another asset class, such as a fiat currency or gold, to stabilize its price)
  • In view of all this, countries were forced to allow cryptos, and El Salvador has become the leader of this trend in LatAm and Caribbean, by making Bitcoin its legal tender.
  • Brazil, Argentina, Colombia, and Ecuador are among the top 20 in Chainalysis’ 2022 Global Crypto Adoption Index.
  • El-Salvador uses a digital wallet known as Chivo to regulate users’ crypto transactions.
• Changed IMF position:
  • IMF in its latest statement has changed its view on cryptos to a degree. It noted that the approach of banning cryptos because of their risks may not be effective in the long run.
  • IMF also called for regulation of cryptocurrency and recording crypto transactions for transparency.
  • In the Latin America and Caribbean region IMF said that they should improve the financial infrastructure and lack of support which drove users to crypto in the first place.
• Block-chain based CBDCs:
  • a number of central banks in the Latin American market are also considering CBDCs, meaning that more people could soon be exposed to blockchain-based infrastructure
  • China’s government, meanwhile, has energetically promoted its digital renminbi (e-RMB). Transactions with its CBDC crossed $13.9 billion last year.
  • Bahamas in the Caribbean was one of the first countries to officially introduce its Sand Dollar CBDC.
• Difference between Crypto-currency and CBDC:
  • CONTROL: Cryptocurrencies and CBDCs are both blockchain-based digital currencies. But while cryptocurrencies are generally run by private companies or individuals, a CBDC is controlled and tracked by a country’s central bank and corresponds to that country’s fiat currency.
  • PRICE: Bitcoin’s price may vary by hundreds or even thousands of dollars in a short period of time, and its founder is a mystery. On the other hand, a CBDC such as the eNaira, issued by the Central Bank of Nigeria, would (ideally) be worth as much as its physical counterpart.
  • USE CASE: While investors often buy large quantities of Bitcoin or other cryptocurrencies and hold them in the hope of making a profit, this doesn’t make sense in the case of CBDCs as they are not meant to be investment vehicles.