Context: Recently, International Monetary Fund (IMF) has warned that adoption of crypto assets such as Bitcoin as national currency can impact a country’s macroeconomic stability.

• The warning came ahead of the Central American nation, El Salvador, officially adopting the world’s most popular decentralized digital currency, Bitcoin, as a legal tender from 7th September.

According to IMF

• Many cryptocurrencies are indeed secure, easy to access, and cheap to transact. However, that in most cases risks and costs outweigh potential benefits.

Risks

• Substantial risks with bitcoin: Privately issued crypto-assets like bitcoin come with substantial risks. Making them equivalent to a national currency is an inadvisable shortcut.
• Too much volatility: Households and businesses would have very little incentive to price or save in a parallel crypto asset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.
• Wastage of time: If goods and services were priced in both a real currency and a crypto-asset, people would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.
• Exchange-rate risks to govt: Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset while expenditures remained mostly in the local currency, or vice versa.
• Banks and other financial institutions could also be exposed to the massive fluctuations in crypto-asset prices.

However, new digital forms of money have some benefits too, like the potential to provide cheaper and faster payments; enhance financial inclusion; improve resilience and competition among payment providers; facilitate cross-border transfers. But doing so is not straightforward.