El Salvador became the first country in the world to adopt bitcoin as legal cash in September, with supporters predicting that the experiment will reduce expenses for billions of dollars in remittances transferred to the Central American country.
The International Monetary Fund (IMF) has again warned that the introduction of digital currencies in emerging areas might lead to the “cryptoization” of local economies, eroding exchange and capital regulations and disrupting financial stability.
According to U.S. blockchain researcher Chainalysis, Bitcoin and its other Crypto currencies skyrocketed in price and popularity in the previous year, with emerging and developing market economies such as Vietnam, India, and Pakistan showing strong growth in some metrics of adoption.
Tobias Adrian, the IMF’s financial advisor, remarked that “capital flow management mechanisms will need to be fine-tuned,” using the word “cryptoization” to describe the process of existing established currencies being supplanted by digital assets.
“Applying established regulatory tools to manage capital flows may be more challenging when value is transmitted through new instruments, new channels and new service providers that are not regulated entities,” Adrian said
Price fluctuations in cryptocurrencies, according to Adrian, are generating “destabilizing” financial flows in emerging nations, while utilizing digital assets instead of fiat money has “immediate and acute concerns.”
“Crypto is being used to take money out of countries that are regarded as unstable [by some external investors],” said the IMF official, adding that it’s “a big challenge for policymakers in some countries.”
Since Bitcoin’s all-time high of $69,000 in November 2021, the crypto market has lost more than $1 trillion in value. According to CoinGecko, the benchmark cryptocurrency is currently trading at $37,600, down 18.7% in the last month and nearly 46% from its November high.
The International Monetary Fund is also concerned about Bitcoin’s expanding ties to traditional financial markets like stocks and government bonds.
“The correlation between crypto and equity markets has been trending up strongly. Crypto is now very closely tied to what is happening in equities. We can’t just dismiss it,” Adrian said.
IMF Vs El Salvador
Last year, El Salvador became the first government in the world to recognize Bitcoin as legal cash. The IMF slammed the plan, which was initially disclosed by the Central American country’s president, Nayib Bukele, at the Bitcoin Conference in Miami.
Last week, the International Monetary Fund (IMF) asked El Salvador to repeal the contentious legislation, claiming that the country’s economy is contracting while its public debt is increasing.
“The adoption of a cryptocurrency as legal tender […] entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities,” the IMF said in a report.
The IMF stated in December that “complete international norms” are required to address these risks, encouraging national and international authorities to develop a “comprehensive, consistent, and coordinated regulatory strategy to cryptocurrency.”
Despite the IMF’s warnings, some El Salvadorian business owners have recently expressed support for President Bukele’s Bitcoin bill, claiming that using cryptocurrency has helped them grow their sales.