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Why is The IMF Afraid of Cryptoization?

There have been a slew of financial problems across so many countries. Some of these problems range from the unexpected change in the supply of products (supply shock) to the persistent high inflation combined with high unemployment in some countries. It’s clear most of our current systems are flawed, and yet, you begin to wonder why the International Monetary Fund is bothered with a stable and working system like cryptocurrency instead of trying to fix these problems

Cryptoization is certainly a new vocabulary not used much in modern terms despite the popular use of crypto in modern times. It would surely be a word now that will be used frequently over the coming years now that a major organization has beamed its searchlight on it. The IMF succinctly pointed out that the greater use of crypto assets in emerging markets and developing economies present some benefits but on the other hand presents some financial risks. The financial risks arise as a result of assets and currency substitution.

This is when countries use cryptocurrencies in addition to or in place of traditional currencies. There is a popular belief among business-oriented persons that the IMF is openly coming out to admit that they are not able to control this system. Crypto news has been rife with so much positive news and developments that anyone can understandably see why the monetary organizations are showing skepticism over something as smooth sailing as bitcoin, Ethereum and their facilitators in trading platforms like Redot.com, and Coinbase.

The IMF plays a large role in coordination of international monetary policy. The organization engineers international trade, promotes sustainable economic growth and development and helps to reduce global poverty. They also promote employment or at least that is what their current portfolio says. In their global financial report in October, the international organization outlined that the three major challenges to the present economy are Covid-19, Crypto and Climate.

It is not entirely surprising that they see digital assets as a threat. Cryptocurrency provides decentralized finance (DeFi). The prior statement has been an issue to governments since the advent of cryptocurrency. With DeFi platforms, the public does not rely on central financial intermediaries such as central banks, brokerages and exchanges but utilization of smart contracts. In blunter terms. it affords the public cutting through all the red-tape and the intermediaries and affording an easier and less complicated access to finances.

Cryptoization Threatens Global Economic Stability warns IMF

It might seem a very farcical statement to describe it as one of the biggest threats facing our world today, even bigger than Covid-19 (In the order with which it was ranked in the IMF report). The IMF first pointed out the price volatility of assets. Since the advent of the digital legal tender, the market capitalization has grown ten times achieving a chunk of its growth in the earlier days of May 2021 ($2.5 trillion) but declined rapidly in the later weeks of the same month.

But the market cap is gradually regaining its shape and is currently at around $2trillion. There was a real bother about the volatility non-stable coins bring. While the stable coins over the long term affords stability and financial security, the non-stable coins possess a lot of drawdowns, a decline overtime (The largest stable coin being tether has reduced dramatically because of the introduction of other crypto tokens like USD Coin and Binance USD by Coinbase, Redot and Binance respectively). But the IMF worried over the fact that investors in developing countries preferred this drawdown to any the equities or local bonds offers, a situation that emphasizes cryptoization, a substitution of national currencies with alternative assets. With crypto news ringing out every minute of every day about the ubiquity and the popularity of crypto, the IMF emphasized that it weakens the credibility of banks.

The stability of stable coins has given investors the confidence not to move their crypto assets outside of the crypto ecosystem, a red flag for any country’s fiat system as citizens will see no need to transact with the country’s currency.

Another instability cryptocurrency poses to the economy according to the IMF is the leeway provided for money laundering and theft. The anonymity and privacy crypto transactions provide leaves a gaping hole for unscrupulous activities. As much as the transactions made on ablockchain technologycan be tracked, the individuals involved cannot. This loophole is exploited every time.

In the IMF paper, there were some challenges outlined posed by the crypto ecosystem. These challenges have not happened on a large scale. The risk of these issues arising increases with the number of people using cryptocurrency. One main risk mentioned in the report is cyber theft.

The very secure nature of blockchain technology has restrictedthe activity of thievery to a minimum but there are some cyber thefts at a smaller scale. People get robbed of their bitcoin and other digital assets from their wallets. There are the risks of bigger crypto thefts like hacking blockchain algorithms but those chances range from very difficult to impossible. The blockchain technologyis close to impregnable.

Another risk posed as mentioned by the monetary organization is when digital assets platforms use to perform these kinds of transaction experience downtime due to traffic. Some of the times these operational disruptions and failures cause losses of significant amounts. When crypto news spread sometime around May of bitcoin news, when the value of the coin dropped to its lowest in 2021, people panicked pulling out of their leveraged positions in some major exchanges. There was some Ethereum news too with investors pulling out their investment after bitcoin price fall. Since it is a decentralized system, there is no credible authority to walk up to.

All these issues and problems were posited by the IMF in their paper.

Another jargon introduced by the IMF is Dollarization where the country puts the fiat system of the dollar above its own.

Conclusion

The IMF has pointed out in not too subtle terms that it does not sit well with this unconventional financial system. This is the same song sung by the government of nations too. There is every possibility that if the next financial bubble bursts or a collapse happens, the IMF and other international financial organizations would make the cryptocurrency world the fall guy. But it remains to be seen and you might want to buy crypto down seeing major fears of Inflation around

 

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