Cryptoization: The Flight to Bitcoin and Stablecoins That Is Scaring the IMF

Key Takeaways

• The IMF has issued two warnings this year on “cryptoization”.
• This currency substitution for crypto usually involves Bitcoin or stablecoins.
• The trend is particularly pronounced in inflation-hit economies.

The International Monetary Fund (IMF) is worried. More and more people are ditching traditional currencies for cryptocurrencies like Bitcoin and stablecoins pegged to the US. dollar. 

This trend, known as “cryptoization,” threatens to undermine central banks and monetary policy around the world. In a September 2023 report  with the Financial Stability Board, the IMF warned stablecoin adoption could “threaten the effectiveness of monetary policy… [and] have significant implications for monetary stability.”

Cryptoization: The Worry

The main concern is that cryptocurrencies could displace domestic currencies. If people choose to receive payments or make transactions in Bitcoin or a dollar-pegged stablecoin instead of the local currency, they are essentially rejecting the money printed by their own central bank. 

This makes it difficult for central banks to influence their economies through interest rates and other monetary policies.

Understandably, the IMF is particularly worried about inflation-hit nations and emerging markets. Tokens like Tether’s USDT or Circles USDC aim to have a stable value linked to a major currency—in this case the dollar. For countries with high inflation and unstable currencies, stablecoins can provide the security (and, well, stability) so lacking in their own national fiat currencies. 

“Inflation in many emerging economies is devastating to citizens in those economies,” Lou Kerner, the founder of the CryptoOracle Collective told CCN.

“It’s no different than a tax. And in countries like Venezuela, Zimbabwe, and Argentina, that tax is over 50% per annum. So it’s not surprising that citizens in those countries would prefer holding assets, like U.S-backed stablecoins, that enable them to avoid that tax.”

Inflation and Stablecoins

However, this comes with significant downsides. When a central bank loses control over money supply and credit, it essentially imports the monetary policy of whichever currency the stablecoin tracks. In this case, the US dollar.

For nations engaged in an ongoing struggle against the dominance of the United States and China, relinquishing authority over their monetary system represents a profound psychological setback. This “crypto contagion” has real economic implications, according to the IMF .

This cryptoization already underway in some countries. In Cuba, Bitcoin and stablecoins are seeing increasing use to get around economic sanctions. 

In Nigeria, many adopt stablecoins to hedge against double-digit inflation of the naira. But, particularly the young and tech-savvy . In fact, since the all-time-highs of 2021, Nigeria is one of only six countries to see sustained growth in cryptocurrency adoption year-on-year, according to Chainalysis .

A 2022 report  from KuCoin shows that 35% of Nigerians between 18 and 80 are using Bitcoin or some other kind of cryptocurrency. One of the highest in the world. Furthermore, 70% of Nigerian crypto investors intend to increase their cryptocurrency investments over the next 6 months. All of this despite strict curbs on banks and a new 10% tax on all crypto profits.

It’s not hard to see why. In Nigeria, inflation in September rose to an 18-year high thanks to soaring food and energy prices. With the naira worth less and less, and dollars harder to come by, a digital version of the dollar that is relatively easy to access and use is a no-brainer for many.

Argentina, which is on the brink of hyperinflation (138% in September), stablecoins make up 31%  of the country’s retail-transaction volume in a country that is already Latin America’s crypto leader. Countries like Zimbabwe and Turkey are seeing similar relationship between stablecoin-use and inflation.

No Obvious Solutions

Not everyone is on the same page as the IMF and FSB. Some, particularly in crypto, are more positive about the situation. Bonart Mati, Chief Growth Officer of Obligate, an on-chain bond issuance platform, told CCN that currency substitution with cryptocurrencies can have its upsides.

“Thanks to stablecoins, small and medium enterprises (SMEs), which tend to constitute a majority of the businesses and thus the revenue of emerging markets, can gain access to capital from investors around the world without the costs typically associated with traditional processes,” she said.

Local investors benefit, too, said Mati. Rather than relying on traditional financial institutions, they can directly support and invest in SMEs using stablecoins on public blockchains. Governments should embrace these economic opportunities and strike a balance with careful regulation.

Cryptoization should not necessarily be stopped, said Mati. “But rather overseen to ensure it does not cause damage and instead is tapped into to better spur the country’s economy.”

Even the joint report by the IMF and FSB concedes  that an outright ban simply wouldn’t work. Instead, targeted restrictions, transparency and legal clarification are a better solution. Although, exactly what these broad terms mean in practice depends heavily on the situation.

For Lou Kerner, one solution is obvious: “As the main cause of inflation is the runaway printing of currency, authorities can print less money.” Of course, printing less money would take away one lever of control for central banks. The very thing they’re trying to get back.