Decrypt’s Art, Fashion, and Entertainment Hub.
As the world continues to watch El Salvador’sexperiment, a senior official at the International Monetary Fund (IMF) has again warned that cryptocurrencies pose “acute risks” for the stability of the financial system.
Using the term “cryptoization” to describe the process of existing established currencies being replaced by digital assets, Tobias Adrian, the IMF’s financial counselor, said that “capital flow management measures will need to be fine-tuned.”
“Applying established regulatory tools to manage capital flows may be more challenging when value is transmitted through new instruments, new channels and new service providers that are not regulated entities,” Adrian told the Financial Times.
According to Adrian, price fluctuations in cryptocurrencies are causing “destabilizing” capital flows in emerging markets, while the use of digital assets in place of fiat money bears “immediate and acute risks.”
“Crypto is being used to take money out of countries that are regarded as unstable [by some external investors],” said the IMF official, adding that it’s “a big challenge for policymakers in some countries.”
The crypto market has lost more than $1 trillion in value since Bitcoin hit its all-time high above $69,000 in November 2021. The benchmark cryptocurrency is trading at $37,600 at press time, down 18.7% in the past month and almost 46% off the November peak, according to CoinGecko.
The IMF is also worried about Bitcoin’s growing correlation to the traditional financial markets, such as stocks and government bonds.
“The correlation between crypto and equity markets has been trending up strongly. Crypto is now very closely tied to what is happening in equities. We can’t just dismiss it,” Adrian said.
IMF vs. El Salvador
El Salvador became the first country in the world to officially adopt Bitcoin as legal tender last year. The move, first announced by the Central American country’s president Nayib Bukele at Bitcoin Conference in Miami, was met with heavy criticism from the IMF.
Last week, the IMF has once again urged El Salvador to ditch the controversial legislation, arguing that the country's economy is shrinking while its public debt is growing.
"The adoption of a cryptocurrency as legal tender [...] entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities," the IMF said in a report.
In December, the IMF said that "comprehensive international standards" are needed to tackle those risks, urging national and global regulators to establish a “comprehensive, consistent, and coordinated regulatory approach to crypto”.
Despite the IMF’s warnings, some business owners in El Salvador have recently shown support for president Bukele’s Bitcoin law, saying that the use of crypto helped increase their sales.