IMF Prefers Central Bank Digital Currencies Over Cryptocurrencies

Over the past few weeks, the International Monetary Fund (IMF) has remained more vocal on cryptocurrencies. At the beginning of the year, the institution raised concerns regarding the improving interconnectedness between virtual assets and financial markets.

Earlier, in December 2021, financial experts had raised a few concerns over cryptos and financial stability. Their sentiments appeared to have put the spotlight back on the cryptocurrency market, calling for a worldwide regulatory framework for these digital currencies.

Aligned with these concerns, the IMF also called for “a comprehensive, coordinated global regulatory framework” as the world entered the year 2022.

It didn’t come as a surprise when the IMF called for El Salvador to remove Bitcoin (BTC) as a legal tender. By the end of January, it also warned of fundamental risks associated with the “use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as fiscal contingent liabilities”.

This was just about the time when Bitcoin prices dropped to sub-$33,000 levels. The sell-off would have been devastating. It would have greatly affected individuals and businesses that had adopted crypto as their legal tender.

The call by IMF to El Salvador to abandon Bitcoin followed an Executive Board Review, which was in response to the country’s government requesting a 1.3-billion-dollar loan in 2021.

Central bank digital currencies (CBDC) also have a few concerns over the cryptos. Several countries have gone live or are in pilot phases of CBDC projects.

According to CBDC Tracker, just two countries have fully developed and issued CBDCs, these being The Bahamas and Nigeria. A number, however, is in pilot phases, including China.

Kenya, among seven other countries in Africa, has also expressed a firm interest in cryptocurrency adoption.

Data from the Absa Financial Index 2021 shows that the Central Bank of Kenya (CBK) is currently researching the benefits of cryptocurrency in enhancing payments efficiency.

Other countries on the list include banking regulators in Eswatini, Ghana, Mauritius, Morocco, Rwanda, Nigeria, and South Africa.

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The exploration of the use of digital currencies is a sign of good hope for the cryptocurrency market in Kenya, especially since the regulator has been slow in supporting its use.

For a long time, there have been perpetual debates surrounding regulation development despite the country experiencing a steady growth in the market.

The growth has been spurred by institutional investors using bitcoin to make an entry into the market.

The renewed interest stems from a 2019 report presented by the Blockchain & Artificial Intelligence task force that strongly recommended that Kenya accepts the use of cryptocurrency due to the inevitable global trend.

It noted that Kenya’s CBK should look into the creation of a digital currency correlating with an individual’s digital identity.

In June 2020, the CBK commenced discussions with other global central banks regarding the possibilities of entering the digital currency space.

Consequently, the U.S is also still early days when it comes to CBDCs, and it is this lack of progress on the CBDC front has had some lawmakers critical of the progress.

This week, however, the IMF favored CBDCs over cryptos. This was despite ongoing concerns amongst many countries including the UK.

Aligned with the position of other IMF members on cryptos, Kristalina Georgieva, the IMF Managing Director, noted that if CBDCs are designed prudently, they can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money.

This is the case when compared to unbacked crypto assets that are inherently volatile. The biggest concern is that stablecoins may not be a match to “a stable and well‑designed CBDC”.

Georgieva, however, failed to mention that CBDCs have evolved as a result of private-sector innovation. She also made no references to the centralized aspects of security concerns related to CBDCs.