There’s been little sunlight this crypto winter, so it may seem odd to present the “Bitcoin as legal tender” argument again. That is, will or should a
There’s been little sunlight this crypto winter, so it may seem odd to present the “Bitcoin as legal tender” argument again. That is, will or should any country — other than El Salvador and the Central African Republic (CAR), which have already done so — declare Bitcoin (BTC) an official national currency?
The International Monetary Fund (IMF) raised the issue again last week in a paper putting forth nine crypto-focused policy actions that its 190 member countries should adopt. First on its list of “don’ts” was elevating crypto to “legal tender.” Or, as the multilateral lending institution’s executive board assessment stated:
“Directors generally agreed that crypto assets should not be granted official currency or legal tender status in order to safeguard monetary sovereignty and stability.”
Maybe it’s not fair to ask the question with crypto back on its heels, but was the IMF right to warn its member banks about cryptocurrencies? And if so, what exactly is lacking in the composition of private digital money that makes it unsuitable as an official national currency? Maybe it’s Bitcoin’s well-documented volatility, but if that’s the case, couldn’t the world’s oldest cryptocurrency still grow into a new role as an auxiliary scrip — perhaps in a few years when it has more users, is more liquid, and exhibits less price variance?
The IMF must tread carefully
“The IMF’s mandate is to promote global economic stability and growth. It is therefore reasonable that the IMF has recently advised countries to refrain from granting legal tender status to crypto-assets, which are, by design, often disruptive in nature,” Gavin Brown, associate professor in financial technology at the University of Liverpool, told Cointelegraph. “Such disruption does arguably present just as many opportunities as threats, but the IMF must tread a more prudent path when faced with such open-ended uncertainty.”
“There are very good economic reasons why most countries would not want to adopt cryptocurrencies like BTC as their local scrip,” James Angel, associate professor at Georgetown University’s McDonough School of Business, told Cointelegraph. “In short, they don’t want to lose the profits from printing their own money or the economic control over the economy that fiat currencies provide.”
While crypto maximalists may skewer governments for printing money non-stop to paper over deficits, “sometimes, the right thing to do is to print money,” added Angel, “like in the Great Recession or the pandemic. The trick is not to print too much, which happened in the pandemic.”
‘Bitcoin was made for the Global South’
In its policy paper, the IMF had multiple arguments for its position beyond crypto’s well-documented volatility. It could expose government revenues to foreign exchange rate risk. Domestic prices “could become highly unstable” because businesses and households would spend time deciding whether to hold fiat or BTC “as opposed to engaging in productive activities.” Governments would have to allow citizens to pay taxes in Bitcoin — and so on.
Adopting crypto as legal tender could even affect a government’s social policy objectives, the IMF paper stated, “particularly for unbacked tokens, as their high price volatility could affect poor households more.”
But questions remain. Even if the IMF arguments are valid and hold in most circumstances, aren’t there exceptions? What about developing countries struggling with inflationary currencies, like Turkey?
“Bitcoin was made for the Global South,” Ray Youssef, co-founder and CEO of Paxful — and a founder of the Built With Bitcoin Foundation — told Cointelegraph. “In the West, a lot of attention is paid toward the suspected volatility of Bitcoin. That’s because the world runs on the dollar and the West is shielded from global inflation. Right now, Turkey has an inflation rate of over 50%, and Nigeria has an inflation rate of over 20% — in these economies, Bitcoin is a strong bet.”
But even in instances like these, it may not be so easy. “In order for cryptocurrency to be used effectively as legal tender in developing countries, governments will [still] need to heavily invest in the technological infrastructure and a suitable regulatory framework,” Syedur Rahman, a partner at law firm Rahman Ravelli, told Cointelegraph. If this can be done, it “will assist in financial inclusion.”
“Adopting a foreign/hard currency or monetary standard is a last resort to rein in hyperinflation,” commented Angel. “But even weak governments like to have the power of the printing press, as it provides a taxation mechanism to pay the troops.”
The Central African Republic made crypto legal tender in April 2022 — the second country to do so, after El Salvador. Some CAR representatives said that crypto would help reduce fees for financial transactions in and out of the country. Maybe that, too, is a valid…
cointelegraph.com