IMF says Bitcoin is no replacement for a national currency
The International Monetary Fund says cryptos can pose challenges to global market conditions and recommends against using them to replace a national currency. Tobias Adrian, Financial Counsellor and Director of Monetary and Capital Markets at the IMF, joins Yahoo Finance with more.
Video Transcript
- [INAUDIBLE] Bitcoin. Bitcoin fell today. It's still trading around $55,000. There's much more at play, though, when we talk about cryptocurrencies. And that's why we have a special guest with us. Tobias Adrian is IMF financial counselor and director of monetary and capital markets, along with our cryptocurrency reporter, Jennifer Schoenberger. And because Jennifer covers crypto on a daily basis, why don't you lead this interview, Jennifer?
JENNIFER SCHOENBERGER: Thanks, Adam. Tobias, thanks so much for being here. So--
TOBIAS ADRIAN: It's wonderful to be here.
JENNIFER SCHOENBERGER: --in your new-- in your new report, the IMF says that cryptocurrencies pose challenges to financial stability globally. And while you don't see systemic risk yet, it bears very close watching. So given the adoption of crypto now, and how it's expected to grow, where do you see the major risks right now?
TOBIAS ADRIAN: Yeah. I would focus on three different aspects. First of all, the crypto market capitalization has gone to over $2 trillion. That's 10 times larger than just two years ago. And while $2 trillion is still small relative to the over $100 trillion of total marketable securities in the world, it is growing very rapidly.
Secondly, the valuation of crypto assets such as Bitcoin are very volatile. We have seen huge swings up and down throughout the year. And the correlation with equity markets is rising rapidly. Thirdly, for many emerging markets the size of investments and the size of capital flows associated with Bitcoin and other crypto assets is large from a macroeconomic point of view. So those would be my top three reasons.
JENNIFER SCHOENBERGER: Tobias, the Center for American Progress just came out with a report recently where they compared the digital asset markets to capital markets in the 1920s. They said that it's rampant with speculation, market manipulation, deception and, quote, outright theft. Where does the IMF fall on this? You mentioned the correlation with equity markets.
TOBIAS ADRIAN: In our view, regulatory steps should be taken to make sure that these markets are safe for investors. So investor protection rules should be enforced. At the [? wallet ?] provider level, you should pass regulations to make sure that identities are captured, that integrity is ensured, and that financial stability is ensured. So we are laying out steps to really get safety into these markets.
- Tobias, we call these currencies when, in fact, assets would probably be-- crypto asset. But we have countries that are experimenting with them as currencies. And yet, you point out, the IMF points out that they are unlikely to catch on in countries with, you know-- we'll call it stable inflation. Why would they not catch on?
TOBIAS ADRIAN: So there are countries with weak institutions, and in those countries, households and firms tend to try to import stability by using foreign currencies or foreign assets. So that's the typical dollarization problem. Now, we have seen recently that there's also quite a bit of adoption of bitcoins and other crypto assets in currencies with weak institutions because households and corporations are looking for safety. We have even seen a country where Bitcoin has been adopted as a national currency.
Of course, the challenge with that is that Bitcoin is extremely volatile. It's much more volatile than equities, commodities, or even exchange rates. And so by adopting crypto assets, you are importing this volatility into the domestic economy. And that can be challenging from a monetary policy perspective, and from a macro perspective more generally.
JENNIFER SCHOENBERGER: Tobias, El Salvador recently just adopted Bitcoin as legal tender. Where does the IMF stand on countries adopting cryptocurrencies as national currencies?
TOBIAS ADRIAN: We don't recommend to adopt Bitcoin as a national currency. The reason is the high volatility of Bitcoin. So it's a form of dollarization, and-- but it's in crypto assets. And of course, the volatility of crypto assets is much higher than the volatility of the dollar. So importing this volatility into a national economy, that generates uncertainty for investment decisions, for tax purposes, for economic policy purposes, and for everyday household decisions.
- Various crypto guests tell us not to worry about contagion or threats to the global financial system. It reminds me of Captain Smith probably being told not to worry about icebergs back in 1912. Should we be worried, and do they pose a threat? Do we understand how far they reach into what might be the legitimate and more traditional financial system?
TOBIAS ADRIAN: We should certainly worry. We should certainly worry about-- about the crypto asset risks to global financial stability. And the reason is that the market is growing rapidly and the correlation with traditional asset classes is getting stronger. That is because traditional investors are moving into that space, and so correlations are increasing. And that could, in principle, raise the risk for potential spillovers or systemic events.
JENNIFER SCHOENBERGER: Tobias, to your point on the potential for contagion, the report does raise the concern of runs in stablecoins, something that other regulators in the US have raised, as well. But then from there, you say that that could trigger a fire sale in the commercial paper market. My question is, do you see any imminent risk there, particularly with Tether? Because if you look at Tether, they hold billions in commercial paper. And there's been speculation that they may have some exposure to China's Evergrande, which, by the way, just missed a third bond payment today. Even if it's just perception, you know, what is the risk there?
TOBIAS ADRIAN: Well, when you look at the market capitalization of stablecoins, they are of the order of magnitude of some of the largest offshore money market funds. So they are not that small anymore. And there's some risk in the investments of their reserve assets. You know, some stablecoins are extremely safe. They are primarily in cash assets. But others are in commercial paper and in riskier investments. We did see earlier this year, in June, a run on one very small stablecoin. And we would urge regulators to take a closer look at the stablecoins to introduce tighter regulations so that investors know what kind of reserves are backing the claim to stability.
JENNIFER SCHOENBERGER: And Tobias, one last question for you. How does the IMF view crypto? Yesterday, Jamie Dimon, CEO of JPMorgan, says that he thinks Bitcoin is worthless, though he does see value in the blockchain technology, and says that stablecoins are real. Does the IMF see value in crypto? How do you see it evolving as part of the global payment system?
TOBIAS ADRIAN: The technology is extremely powerful. Blockchain and distributed ledger technology, DLT, is very powerful. And we expect that to have a positive impact on the financial system in coming years. In fact, all the 100 central banks around the world are already exploring to introduce central bank digital currencies. And a number of central banks would base that on these new technologies. So that could reap the benefits of the new technologies, the power of cheaper payments, better cross-border payments, more powerful technologies, financial inclusion, while being extremely stable and safe. So the policy really has to try to get the benefits from new technologies balanced against the risks. And we have to rebalance to reap all the benefits at this point.
- Tobias Adrian is the IMF financial counselor and director of Monetary and Capital Markets. Jennifer Schoenberger covers crypto for us. And by the way, you can read her latest article right now on the YahooFinance.com webpage and on the app. And it's on this very issue. A lot of people very concerned about crypto, others very interested in making a buck off of--
