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New IMF report warns G20 of risks associated with digital currency adoption

The International Monetary Fund (IMF) has drawn the attention of G20 nations to the risks posed by the increasing adoption of digital currencies by citizens.

The report, titled “Macrofinancial Implications of Crypto Assets,” was revealed to the public during a G20 meeting in India, days after Silvergate Bank and Silicon Valley Bank collapsed. According to the report, digital currencies present a myriad of risks to the economies of G20 nations pertaining to both external and internal stability.

Top of the list for the IMF is the concern that growing digital currency usage could challenge the effectiveness of the monetary policy. As more citizens pivot from fiat to digital currencies denominated in foreign currencies, the IMF remarks that “cryptoization” of the local economy will be inevitable.

Another concern by the IMF is the absence of proper backing of stablecoins which it says could trigger contagion to the broader financial system. Runs on stablecoins have the potential to trigger the liquidation of reserves, as illustrated in the de-pegging on TerraUSD (UST) that led to billions in losses.

On the external stability side of things, the IMF noted that increased adoption might affect capital flow stability and the Global Financial Safety Net (GFSN), adversely impacting payment system efficiency. According to the report, there is also the attendant risk of nations using digital currency networks to isolate themselves from the global drive to achieve improved cross-border payment functionalities.

“A widespread proliferation of crypto assets comes with substantial risks to the effectiveness of the monetary policy,” the report read. “Moreover, changes may be required to central bank reserve holdings, and the global financial safety net, yielding potential instability.”

Other concerns for the IMF include the risks stemming from the use of open architecture, which allows certain bad actors to contribute malicious codes, and a shift from commercial bank deposits could affect the ability of financial institutions to offer loans.

Not all doom and gloom

While the IMF report to the G20 appeared damning to digital currencies, it still managed to identify some benefits associated with their usage. The report confirmed that blockchain technology could provide higher operational resilience than centralized entities in the financial sector.

It went on to postulate that stablecoins deliver healthy competition to commercial banks if the risks are properly managed. The IMF notes that their usage “may spur private sector innovation by diffusing technological improvements” and reducing transaction costs of consumers.

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