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The International Monetary Fund (IMF) has described the adoption of cryptocurrencies as national currency by some countries as “inadvisable shortcut”.

In June, El Salvador, a country in Central America, became the first country to offically adopt Bitcoin as legal tender.

In a blog post published on Monday, the Bretton Woods institution acknowledged the advantages of digital currencies’ underlying technologies, but emphasised that “attempting to make cryptoassets a national currency is an inadvisable shortcut.”

The post was written by Tobias Adrian, the financial counselor and director of the IMF’s monetary and capital markets department, and Rhoda Weeks-Brown, general counsel and director of the IMF’s legal department.

“Some countries may be tempted by a shortcut: adopting cryptoassets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits,” the post reads.

“Cryptoassets are privately issued tokens based on cryptographic techniques and denominated in their own unit of account. Their value can be extremely volatile.

“Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.”

According to the IMF directors, cryptocurrencies are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions.

“Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy,” the post further reads.

“Even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset.

“A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.

“Then again, real currency may not always be readily available, nor easily transferable.

“Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.”

IMF listed the possible effects of widespread adoption of cryptocurrency to include macroeconomic instability, reductions in government revenues, legal issues and a weak monetary policy.

They warned that domestic prices could become highly unstable, financial integrity could also suffer, and added that banks and other financial institutions could be exposed to the massive fluctuations in cryptocurrency prices.

“Moreover, widespread cryptoasset use would undermine consumer protection. Households and businesses could lose wealth through large swings in value, fraud, or cyber-attacks. While the technology underlying cryptoassets has proven extremely robust, technical glitches could occur. In the case of Bitcoin, recourse is difficult as there is no legal issuer,” the post reads.

“Finally, mined cryptoassets such as Bitcoin require an enormous amount of electricity to power the computer networks that verify transactions. The ecological implications of adopting these cryptoassets as a national currency could be dire.”

The IMF advised governments to leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability.