On January 25, leaders of the International Monetary Fund (IMF) called on El Salvador to “limit” its bitcoin law by “removing the status of bitcoin as a legal tender.” The foundation wrote that the use of cryptocurrencies, as the Central American country did, “is associated with significant risks to financial and market integrity, financial stability and consumer protection.”
Why did the IMF ask El Salvador to actively abandon the cryptocurrency experiment? This small country, ranked 104th in the world in terms of GDP, poses absolutely no threat to the World Bank’s balance sheet. In addition, 70% of the population of El Salvador has no bank accounts, and a fifth of GDP comes from remittances to the United States. It can be said that he can benefit from the use of Bitcoin (BTC).
On the other hand, it has only been half a year since El Salvador announced the legal tender for bitcoin – the first country in the world to do so. Is this time really enough to draw any useful conclusions?
One of the IMF’s goals is “to ensure exchange rate stability,” Gavin Brown, an assistant 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 fall of 50% from record market prices for November. “This clearly gives the IMF a mandate, at best, to be vigilant against volatile monetary alternatives such as bitcoin.”
But this story may not be complete. “The physical impact of a country turning to bitcoin like them is not a big problem in itself,” Brown continued. “However, it is important to note that this will be sent to other countries if [El Salvador] succeeds.”
Brown noted that more than 65 countries now link their currencies to the US dollar. “This, together with the dollarization of oil and the strength of the US economy, ensured that the dollar took precedence.” Bitcoin and consequently El Salvador do not yet pose a direct threat to this. “But the key word there is ‘yet.’ As a result, Bitcoin and El Salvador may turn their attention to other countries.”
Others were not surprised that the IMF asked the country to drop the lawsuit against legal tender. “It does not surprise me that the IMF is sending this request to El Salvador for several 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 for fewer borrowers, not more, Al-Taweel said. In addition, El Salvador does not have a very good relationship with the IMF and the capital markets in general. But there may be something more self-serving behind it, he suggested, adding:
“Perhaps if bitcoin becomes a strong reserve currency around the world, the IMF may seem less efficient and less necessary.”
The risk listed in the fund’s January 25 statement, including financial stability, “does not seem like a good enough reason given that there is very little evidence of widespread use of bitcoin in daily transactions in El Salvador,” Syed said. Rahman, a partner in the Rahman Rafeli law firm, tells the Cointelegraph.
What made the foundation act then? “The International Monetary Fund is clearly reacting to the recent fluctuations in the markets,” said Abdel-Rahman. Given the decline in prices and the apparent decline in investor demand for BTC, according to the IMF, “it is unclear whether the current structure attracts a permanent source of liquidity.”
Major or Renegade
But maybe the IMF knows what they’re talking about. What if Salvadoran President Neb Bokel was more of a stumbler than a visionary, and the country’s vast experience was just a gigantic mistake?
Al-Taweel acknowledged that “El Salvador’s experience failed”. Technical problems arose, and the recent fall in the Bitcoin market price did not help. “El Salvador is not an example of a strong and prosperous economy. Therefore, it is unlikely that there will be a large number of followers behind El Salvador. ”
“I see no evidence that bitcoin adoption has been successful, so I think it is unlikely that any country will follow suit,” John Hawkins, a senior lecturer at the University of Canberra’s School of Politics, Economics and Society, told Cointelegraph.
One possible exception, Hawkins added, could be countries where hyperinflation has led to a loss of confidence in the national currency, such as Venezuela, “but even there, dollarization or a currency table would be a better option” than using Bitcoin.
Hawkins continued that foreign investment in El Salvador has not increased since September, when BTC became the legal tender. “President Bukele promised he would add 25% to El Salvador’s GDP.” It did not happen.
84% acceptance rate?
On the other hand, a report from Ark Investment Management published at the end of January states that the use of cryptocurrency in the country has increased dramatically.