Improved financial inclusion, increased resilience, increased competition among payment providers, and easier cross-border transactions are possible benefits of new digital money.
However, doing so is not simple. It necessitates a substantial financial commitment and challenging policy decisions, like defining how the public and private sectors will provide and control digital forms of money.
A quick fix like using crypto assets as national currencies may tempt certain nations. Many are safe, simple to use, and reasonably priced. But in our opinion, risks and expenses typically outweigh any potential advantages.
Cryptoassets are privately issued tokens with their unit of account and based on cryptographic methods. Their value may be very erratic. For instance, the price of Bitcoin peaked in April at $65,000 before falling to less than half that amount two months later.
But Bitcoin continues to exist. Some may use the opportunity to conduct business anonymously for good or ill. Others use it as a way to diversify their portfolios and hold a risky asset that has the potential to be either profitable or highly costly.
Thus, crypto assets vary fundamentally from other types of digital currency. For instance, central banks are considering releasing digital currencies, which would be money issued as a bank’s liability. Private businesses are also pushing the envelope with products like stablecoins, whose value is based on the security and liquidity of the underlying assets, and money that can be sent over mobile phones, which is popular in China and East Africa.
Cryptocurrencies as a kind of money?
Even though Bitcoin and its competitors have largely remained on the periphery of finance and payments, certain nations are actively exploring making crypto assets legal tender and possibly a second (or even the sole) national currency.
If a crypto asset were given legal tender status, creditors would have to accept it as payment for debts, including taxes, similarly to how they take notes and coins (money) issued by the government.
Countries can even go farther by enacting legislation to promote crypto assets as a national currency or as a required payment method for everyday purchases and an official monetary unit (in which financial obligations can be represented).
Cryptoassets are unlikely to become popular in nations with reliable institutions, stable inflation, and exchange rates. Even if Bitcoin were to be given legal tender or money status, households and businesses would have little reason to invest in it. Simply put, their value is too erratic and disconnected from the real economy.
Adopting a crypto asset would probably be less appealing than using a globally recognized reserve currency, even in somewhat less stable economies.
Unbanked individuals may succeed in using a crypto asset as a payment method but not as a means of value storage. Upon receipt, it would be promptly converted into actual money.
On the other hand, real money might not always be accessible or transportable. Additionally, laws in certain nations prohibit or place limitations on using other forms of payment. These might tip the scales in favor a more widespread adoption of crypto assets.
Do so with caution.
The most apparent impact on macroeconomic stability comes from the widespread use of a crypto asset like Bitcoin. If prices for goods and services included real money and crypto assets, people and companies would be forced to choose which to hold, devoting significant time and resources away from more valuable endeavors. Similarly, if taxes were quoted in advance in a crypto asset while spending was mostly made in local currency or vice versa, government income would be subject to exchange rate risk.
Additionally, monetary policy would lose its edge. Central banks cannot set interest rates on foreign currency. A nation typically “imports” the credibility of a foreign monetary policy when it adopts a foreign currency to align its interest rates and economy with the global business cycle. Both of these are impossible if crypto assets are widely used.
Domestic prices may consequently become quite unstable. Prices of imported products and services would still fluctuate greatly, according to the vagaries of market values, even if all costs were quoted in Bitcoin.
Financial integrity might also be compromised. Cryptoassets can be used to launder illegally obtained funds, finance terrorism, and escape taxes without effective anti-money laundering and counterterrorism funding regulations. This might put a nation’s financial system, fiscal situation, connections with other countries, and correspondent banks at risk.
The Financial Action Task Force has established guidelines for regulating virtual assets and related service providers to reduce dangers to financial integrity. But considering the possibility of cross-border activity, implementing that criterion is not yet uniform across all nations.
Additional legal difficulties come up. A payment method must be widely accepted to be considered legal tender. However, many nations still lack the technology and internet access necessary to transfer crypto assets, raising concerns about justice and financial inclusion. The official monetary unit’s value also needs to be steady enough to allow for its usage in medium- to long-term financial commitments. And to prevent resulting in a fragmented legal system, changes to a nation’s legal tender status and monetary unit often necessitate complex and extensive modifications to economic law.