On January 25, the Directors of the International Monetary Fund (IMF) urged El Salvador to “limit the scope’ of its Bitcoin Act by ‘repealing Bitcoin’s legal tender status’. Adopting a cryptocurrency, as the Central American country has done, “poses major risks to financial and market integrity, financial stability and consumer protection,” according to the fund wrote.
Why did the IMF ask El Salvador to effectively pull the plug on its cryptocurrency experiment? Certainly this small country – ranked 104th in the world by gross domestic product (GDP) – is no threat to the international bank’s balance sheet. In addition, 70% of El Salvador’s population is unbanked and one-fifth of its GDP comes from remittances from the United States. It could arguably be from bitcoins (Bitcoin) use.
On the other hand, it is only half a year since El Salvador declared Bitcoin legal tender – as the first nation in the world. Is that really enough time to draw useful conclusions?
One goal of the IMF is to “ensure exchange [rate] stability,” Gavin Brown, associate professor of financial technology at the University of Liverpool, told Cointelegraph. Bitcoin and cryptocurrencies in general have shown extreme volatility, as evidenced by the recent 50% drop from record market prices in November. “This clearly gives the IMF a mandate to be cautious at best on volatile monetary alternatives like Bitcoin.”
Other motives
But that might not be the whole story. “The material ramifications of such a nation moving towards bitcoin as they have is not in itself a big deal,” Brown continued. “However, what is important is the signal this sends to other nations should they do so [El Salvador] make it a success.”
After all, more than 65 countries currently peg their currencies to the US dollar, Brown noted. “This, along with the dollarization of oil and the strength of the US economy, has secured the primacy of the dollar.” Bitcoin, and with it El Salvador, is not yet a direct threat to it. “But the key word there is ‘still.’ Other nations could get their heads turned by Bitcoin and El Salvador as a result.”
Others were not surprised that the IMF asked the country to end its legal tender experiment. “I’m not surprised that the IMF is making this request to El Salvador for a number of reasons,” David Tawil, president and co-founder of ProChain Capital, told Cointelegraph.
As a global lender of last resort to sovereign nations, the IMF wants fewer borrowers, not more, Tawil said. Also, El Salvador doesn’t have a particularly good record with the IMF and capital markets in general. But there could also be something more selfish about it, he suggested, adding:
“It is possible that the IMF will be seen as much less effective and less necessary as Bitcoin becomes a strong global reserve currency.”
Additionally, the risks listed in the fund’s Jan. 25 statement, including financial stability, “do not appear to be a compelling reason as there is very little evidence of the widespread use of bitcoin for everyday transactions in El Salvador,” he said Syed Rahman, a partner at law firm Rahman Ravelli, told Cointelegraph.
What prompted the fund to act back then? “The IMF is clearly reacting to recent market volatility,” Rahman said. Given the drop in price and apparent drop in investor demand for BTC, the IMF says it is “not clear that the current structure is attracting a recurring source of liquidity.”
pioneer or renegade
But perhaps the IMF knows what it is talking about. What if Salvadoran President Nayib Bukele is more of a stumbler than a seer and his nation’s grand experiment is just a huge botch?
“El Salvador’s experiment didn’t go very well,” Tawil admitted. Technical issues have arisen, and Bitcoin’s recent market price drop hasn’t helped. “El Salvador is not a showcase for a strong and prosperous economy. So it was never likely that there would be a long line of supporters behind El Salvador.”
“I don’t see any evidence that Bitcoin adoption was a success,” John Hawkins, a lecturer at the Canberra School of Politics, Economics and Society, University of Canberra, told Cointelegraph, “so I think it’s unlikely that it was.” many if all countries will follow.”
A possible exception could be countries where hyperinflation has led to a loss of confidence in the local currency, like Venezuela, Hawkins added, “but even there, dollarization or a currency board would be a better option” than Bitcoin adoption.
Also, since September, when BTC became legal tender, there hasn’t been a surge in foreign investment in El Salvador, Hawkins continued. “President Bukele promised to increase El Salvador’s GDP by 25%.” That didn’t happen.
An 84% adoption rate?
On the other hand, an Ark Investment Management report Issued in late January, it reported that crypto adoption in the country had surged. “An estimated 3.8 million people use El Salvador’s Chivo bitcoin wallet, indicating 84% adoption among eligible citizens.” According to the report, more people now have bitcoin wallets than traditional bank accounts (1.9 million).
Hawkins wasn’t impressed. Salvadorans who would have followed President Bukele’s advice to hold bitcoin instead of dollars would have lost a significant portion of their savings, he told Cointelegraph, adding:
“Not surprisingly, many people wanted a Chivo wallet since it came with $30 free. News reports suggest that many people simply withdrew the $30 and have not used the wallet since.”
Ark Investment also noted that as of October 2021, Chivo processed $2 million in daily remittances, “representing approximately 12% of El Salvador’s $6 billion in annual remittances and more than 2% of its GDP.” “. The nation’s bitcoin game has opened up unprecedented financial opportunities for its citizens, said Ark CEO Cathie Wood.
“Hopefully, El Salvador will continue its experiment,” Tawil told Cointelegraph, predicting it would achieve “slow but important success.” And the price of bitcoin will go up again.” Indeed, in the long term:
“El Salvador could be the key trailblazer for the sector.”
Still, is there a price to pay if El Salvador continues to flout IMF guidelines? “It matters what the IMF says,” Hawkins said. “Even if you don’t respect their expertise, El Salvador looked to you for a loan.” The dissolution of the fund and actions the multilateral bank sees as risky only make it harder for El Salvador to obtain the loan.
A hidden agenda?
What about this notion that the IMF has ulterior motives and is simply hostile to cryptocurrencies because they threaten the US dollar and/or the established global banking system?
“I absolutely agree,” said Tawil. “I think the IMF is a self-serving organization and is probably just as corrupt as other world governing bodies, like the International Olympic Committee.”
Hawkins disagreed. “I don’t think the IMF is motivated to protect banks. They care about the welfare of the people of El Salvador and also want El Salvador to be able to repay loans from the IMF.”
The IMF has taken a “rather aggressive approach” towards cryptocurrency-related products, Rahman commented, but the current volatility is affecting all markets, not just cryptocurrencies. “It is also worth noting that El Salvador’s relationship with the United States has deteriorated, and it could be inferred that this is a contributing factor.”
What about the timing of the IMF’s message, why now? The fund has been critical of El Salvador’s BTC experiment from the start, Tawil said, but “the current drop in bitcoin price allows the IMF to scream, ‘I told you so,’ and add force behind its opinion.” to have.”
Bukele notably bought more BTC during the recent crypto drawdown. “Most people go in when the price is high,” he says tweeted on Jan. 24, “but the safest and most profitable time to buy is when the price is down. It’s not witchcraft.”
read the future
The IMF’s demands on El Salvador regarding bitcoin “show that the institution is on the wrong side of history,” deVere CEO Nigel Green said in an emailed press release. “The IMF [is] to urge a pioneering sovereign nation to abandon forward-thinking fiscal policies that seek to lift it out of financial instability and dependence on another country’s currency.”
It should also be remembered that the IMF is based in Washington, DC, that the US is a founding member and the US is also the largest contributor to the international body which has 190 member countries. “The fate and interests of the IMF and the US are therefore arguably inseparable,” Brown told Cointelegraph.
