Banning Crypto Assets May Not Be Effective in The Long Run, Says IMF

The International Monetary Fund (IMF) appears to be adopting a more measured approach towards cryptocurrencies as the digital assets landscape evolves.

In a blog post published Thursday, June 22, the global lender discussed the potential effectiveness of banning crypto assets calling for a more receptive approach to managing them. Delving into Latin America and Caribbean (LAC) region, the lender highlighted the progress made by countries such as Bahamas, Brazil and Jamaica, stating that LAC countries are leading the way in crypto adoption, with several nations introducing CBDCs to enhance financial inclusion, strengthening payment systems, and reducing cross-border remittance costs.

According to the lender, their potential benefits fueled the demand for crypto assets, including protection against economic instability and improved financial inclusion. However, despite this growth, the lender warned that adopting crypto assets also comes with challenges and risks stating that countries with a history of instability, low institutional credibility, corruption, and extensive informal sectors face particular risks.

The blog went on to point out the risks associated with adopting crypto assets, such as Bitcoin, even when supported by the government, as, in its opinion,  their acceptance as a medium of exchange may not be widespread.

“El Salvador’s experience with Bitcoin suggests there are risks to adopting unbacked crypto assets—those that rely on supply and demand rather than on any asset for value and that are subject to significant price volatility—even when explicitly supported by the government,” said the IMF.

Despite the outlined risks, the lender acknowledged the potential benefits of cryptocurrencies and emphasized the importance of tailored regulation and policy frameworks to manage risks effectively.

“While a few countries have completely banned crypto assets given their risks, this approach may not be effective in the long run. The region should instead focus on addressing the drivers of crypto demand, including citizens’ unmet digital payment needs, and on improving transparency, by recording crypto asset transactions in national statistics,” it added. 

IMF’s recent blog builds upon its previous work on effective policies for crypto assets. In a February guidance report,  the lender addressed member countries on the importance of an appropriate policy response to crypto assets arguing that “doing nothing is untenable as crypto assets may continue to evolve” despite the recent industry headwinds.

That said, IMF’s evolving stance on crypto assets, considering its past concerns about crypto assets, especially after El Salvador’s move to make Bitcoin legal tender, reflects its recognition of the importance of tailored regulation and policy frameworks for the sector. This shift indicates progress for the industry as a whole.

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