On Jan. 25, the International Monetary Fund’s (IMF) directors asked El Salvador to “narrow the scope” of its Bitcoin Law by “removing Bitcoin’s legal
On Jan. 25, the International Monetary Fund’s (IMF) directors asked El Salvador to “narrow the scope” of its Bitcoin Law by “removing Bitcoin’s legal tender status.” Adopting a cryptocurrency as the Central American country has done “entails large risks for financial and market integrity, financial stability and consumer protection,” the fund wrote.
Why did the IMF ask El Salvador to effectively pull the plug on its cryptocurrency experiment? Surely this small country — ranked 104th globally in gross domestic product (GDP) — is no threat to the international bank’s balance sheet. Moreover, 70% of El Salvador’s populace is unbanked, and one-fifth of its GDP is from United States remittances. Arguably, it could profit from Bitcoin’s (BTC) use.
Then again, it’s only been half a year since El Salvador declared Bitcoin legal tender — the world’s first nation to do so. Is that really enough time to draw any useful conclusions?
One objective of the IMF is “to ensure exchange [rate] stability,” Gavin Brown, associate professor in financial technology at the University of Liverpool, told Cointelegraph. Bitcoin and cryptocurrencies generally have exhibited extreme volatility, evident in the recent 50% drawdown from November’s record market prices. “This clearly gives a mandate for the IMF to be at best cautious of volatile monetary alternatives such as Bitcoin.”
Other motives
But that may not be the whole story. “The material impact of such a nation pivoting toward Bitcoin as they have done is in itself not a big deal,” Brown continued. “However, what is important is the signal that this sends to other nations should they [El Salvador] make a success of it.”
After all, more than 65 countries presently peg their currencies to the U.S. dollar, Brown noted. “This, along with the dollarization of oil and the strength of the U.S. economy, has ensured the primacy of the dollar.” Bitcoin and, by extension, El Salvador are not yet a direct threat to this. “But the keyword there is ‘yet.’ Other nations may have their heads turned by Bitcoin and El Salvador as a consequence.”
Others were unsurprised that the IMF was asking the country to scrap its legal tender experiment. “It does not surprise me that the IMF is making this request of El Salvador for multiple reasons,” David Tawil, president and co-founder of ProChain Capital, told Cointelegraph.
As the world’s lender of last resort to sovereign nations, the IMF is looking to have fewer, not more, borrowers, said Tawil. Then, too, El Salvador doesn’t have a particularly sterling record with the IMF and capital markets generally. But there might be something more self-serving behind it, too, he suggested, adding:
“It is possible that if Bitcoin becomes a strong worldwide reserve currency, the IMF may be deemed a lot less effective and necessary.”
Moreover, the risks listed in the fund’s Jan. 25 statement, including financial stability, do “not seem to be a compelling enough reason, given there is very little evidence of the widespread use of Bitcoin for day-to-day transactions in El Salvador,” Syed Rahman, a partner at law firm Rahman Ravelli, told Cointelegraph.
What spurred the fund to action then? “The IMF is clearly reacting to the recent volatility within the markets,” said Rahman. Given the price retrenchment and apparent drop in investor demand for BTC, “it’s not clear whether the current structure is attracting a recurrent source of liquidity” in the IMF’s mind.
Pioneer or renegade
But maybe the IMF knows whereof it speaks. What if Salvadoran President Nayib Bukele is more stumbler than seer, and his nation’s grand experiment is just a giant bungle?
“El Salvador’s experiment hasn’t gone very well,” acknowledged Tawil. Technical problems have emerged, and Bitcoin’s recent market price drop hasn’t helped. “El Salvador is not a poster child for a strong and thriving economy. So, it was never likely that there was going to be a long line of followers behind El Salvador.”
“I don’t see any evidence that the Bitcoin adoption has been a success,” John Hawkins, senior lecturer at Canberra School of Politics, Economics and Society, University of Canberra, told Cointelegraph, “so I think it’s unlikely that many, if any, countries will follow.”
One possible exception could be countries where hyperinflation has led to a loss of confidence in the national currency such as Venezuela, Hawkins added, “but even there, dollarization or a currency board would be a better option” than adopting Bitcoin.
Nor has there been any surge in foreign investment in El Salvador since September when BTC became legal tender, continued Hawkins. “President Bukele promised it would add 25% to El Salvador’s GDP.” That hasn’t happened.
An 84% adoption rate?
On the other hand, an Ark Investment Management report issued in late January recounted that crypto adoption had soared in…
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