Abu Dhabi, UAEThursday 18 July 2019

Cryptocurrencies not a substitute for traditional money, IMF says

Market capitalisation of all virtual money has fluctuated erratically, which makes them less reliable

An employee inspects machines for the production of bitcoins and litecoins at the "CryptoJuniversóe" mining centre in Kirishi, Russia. AFP
An employee inspects machines for the production of bitcoins and litecoins at the "CryptoJuniversóe" mining centre in Kirishi, Russia. AFP

Despite their popularity, cryptocurrencies cannot replace traditional currencies, International Monetary Fund officials said in a survey this month.

"Despite the hype, cryptocurrencies still don’t fulfill the basic functions of money as a store of value, means of exchange, and unit of account," Antoine Bouveret, an economist, and Vikram Haksar, an assistant director, at the IMF, said about their findings. "Because their value is highly volatile, they have little use so far."

Bitcoin, the largest cryptocurrency globally, lost as much as 80 per cent of its value from an all-time high of around $20,000 (Dh73,460) in December 2017. The cryptocurrency surged as much as 3 per cent against the US dollar to about $4,000 this week. The market capitalisation of all cryptocurrencies has fluctuated erratically, declining to $139 billion as of this week from a high of $600bn in December 2017, according to data from CoinMarketCap.com.

A cryptocurrency, also known as electronic money, is intangible, unlike physical banknotes or coins. Crypto assets are similar to physical currencies only in a way that they can be used to purchase goods and services, and transactions can be tracked on a digital ledger. The three most commonly traded virtual monies are bitcoin, ethereum and litecoin.

Electronic money's advantage over physical currency is that it can facilitate faster transactions and borderless transfer of ownership. However, it is difficult to trace and massive theft of cryptocurrencies through hacking has occurred.

"Anonymity of many cryptocurrencies makes them vulnerable to use in money laundering and terrorism financing, if no intermediary checks the integrity of transactions or the identity of the people making them," Mr Bouveret and Mr Haksar wrote.

The IMF officials acknowledged that blockchain "could reduce the cost of international transfers, including remittances, and foster financial inclusion", echoing statements made by the IMF head last November at a FinTech conference.

Christine Lagarde said electronic money is "not science fiction" and that central banks should consider issuing digital currency, perhaps to get ahead of challenges in affecting control over capital as use of crypto assets widens.

"Cryptocurrencies could present challenges for central banks were they to affect control over the money supply, and therefore, the conduct of monetary policy," the IMF officials said.

Some payment services now make overseas transfers in a matter of hours, not days, and the technology can provide benefits beyond the financial system, Ms Lagarde said.

Digital currencies could help achieve public policy goals around financial inclusion, privacy and security, according to Ms Lagarde, which the IMF's survey also reported.

The use of such modes of payment would also avoid a situation where “too much power could fall into the hands of a small number of outsized private payment providers”, she said.

Updated: March 19, 2019 01:57 PM

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