Antoine Bouveret and Vikram Haksar Economists and part of the Policy Strategy and Review Department of International Monetary Fund (IMF) on Cryptocurrencies and Digital Economies.
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Despite the hype, cryptocurrencies still don’t fulfill the basic functions of money as a store of value, means of exchange, and unit of account. Because their value is highly volatile, they have little use so far as a unit of account or a store of value. Limited acceptance for payment restricts their use as a medium of exchange. Unlike with fiat money, the cost of producing many cryptocurrencies is high, reflecting the large amount of energy needed to power the computers that solve the cryptographic puzzles. Finally, decentralized issuance implies that there is no entity backing the asset, so acceptance is based entirely on users’ trust.
Cryptocurrencies and their underlying technologies offer benefits but also carry risks. Distributed ledger technology could reduce the cost of international transfers, including remittances, and foster financial inclusion. Some payment services now make overseas transfers in a matter of hours, not days. The technology can provide benefits beyond the financial system. For example, it can be used to securely store important records, such as medical histories and land deeds. On the other hand, the pseudo- anonymity of many cryptocurrencies makes them vulnerable to use in money laundering and terrorism financing, if no intermediary checks the integrity of transactions or the identity of the people making them. Cryptocurrencies could also eventually present challenges for central banks were they to affect control over the money supply and therefore the conduct of monetary policy.