Buying Bitcoin? What IMF said about cryptocurrency craze will scare you

The cryptocurrency craze is sweeping across the world and India is no exception. Investors are taking to cryptocurrencies like Bitcoin in huge numbers with India now soaring to the 2nd spot on the 2021 Global Crypto Adoption Index. However, central banks have been sending warnings about the problems and massive risk involved in trading in cryptocurrencies. Now, the International Monetary Fund (IMF) has stepped in and what it says should send investors scurrying to get rid of Bitcoin or any other cryptocurrency they may have bought into.

The advent of digital currencies in emerging markets could spark "cryptoization" of local economies and upset financial stability, the International Monetary Fund said on Friday.

Also read: Looking for a smartphone? Check Mobile Finder here.

"Cryptoization" could also become a threat to fiscal policy, with digital assets possibly facilitating tax evasion, the IMF added.

What is driving the cryptocurrency craze

Bitcoin and its kin have in the last year soared in price and popularity, with emerging and developing market economies such as Vietnam, India and Pakistan seeing rapid growth, according to U.S. blockchain researcher Chainalysis.

The IMF said that unsound macroeconomic policies and inefficient payment systems are among the drivers of cryptocurrency adoption in emerging economies, along with the lure of quick gains that has also excited investors across the world, reports Reuters.

Cryptocurrencies offer, in theory, a cheaper and quicker way of sending money across borders. Backers say digital tokens such as stablecoins could also help protect savings from high inflation or fluctuations in local currencies.

Factors such as low credibility of central banks and weak domestic banking systems that can fuel "dollarization" can also contribute to growing crypto use, the Fund added.

Dollarization is where a foreign currency - typically the U.S. currency - is used in addition to, or instead of, a domestic currency. High inflation or the instability of a domestic currency are among the drivers of the process.

"Dollarization can impede central banks' effective implementation of monetary policy and lead to financial stability risks through currency mismatches on the balance sheets of banks, firms, and households," it said.

How prevalent is cryptocurrency adoption?

In September, El Salvador became the first country in the world to adopt bitcoin as legal tender, with backers tipping the experiment to lower costs for billions of dollars of remittances sent to the Central American nation.

But the IMF said the exact level of adoption of crypto in emerging economies was hard to gauge accurately.

Are there alternatives to cryptocurrencies?

Wide adoption of stablecoins - digital tokens designed to hold a steady value and seen as useful for savings and commerce - could also pose significant challenges by reinforcing existing dollarization forces, the IMF said.

What governments can do

The fund urged developing nations to strengthen macroeconomic policies and consider the possible benefits from issuing central bank digital currencies as a response to the rise of crypto.