The IMF’s Selfish Case Against Bitcoin | David Z. Morris

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In June, I wrote that El Salvador’s decision to adopt bitcoin as legal tender was the most significant development in cryptocurrency history so far. On the contrary, it was confirmed when the International Monetary Fund, a world development bank closely linked to the richest countries in the world, quickly declared that the move raised a number of macroeconomic, financial and legal issues. The statement amounted to a veiled threat, as El Salvador was in negotiations for a $ 1 billion IMF loan. But the IMF at the time had not provided any real details on the problems faced with the domestic adoption of bitcoin.

This week we got a better look at what these issues could be.

What we got was an IMF blog post titled Cryptoassets as National Currency? One step too far that equates to a laundry list of top-level cryptocurrency reviewers. It includes few nuances, however, about their alleged weakness as a national currency, and is even less specific about El Salvador’s plan. While she understands a few important points, most of the statement could have been taken from a Twitter rant by Peter Schiff: His main arguments include the volatility of cryptocurrencies, use for money laundering, and demand. electricity, which range from irrelevant to outright false.

In all fairness, this was an informal blog post aimed at a large audience. But the lack of subtlety of an entity that has such a huge influence on the well-being of many of the world’s most vulnerable people is disappointing, if not downright frightening. This would seem to reinforce the feeling that the IMF’s objection to bitcoinization is less about the stability of economies that dare to innovate and more about maintaining the IMF’s position of power over them.

Fake crypto problems

I will briefly dispense with several of the points raised in the IMF post. The first is that the volatility of cryptocurrencies makes them unsustainable for long-term debt obligations, or even for short-term applications like corporate pricing, with disruptive economic effects. This is a reasonable argument against adopting bitcoin as the single currency of a sovereign country today.

But that doesn’t respond to El Salvador’s current proposal, which would maintain the country’s current currency for overnight prices, payments, and debt, while adding bitcoin as an option for government payments and reserves. This could be seen as a transitional phase. The long game here would theoretically see bitcoin (or some other crypto asset) adopted by a growing number of countries, potentially increasing its stability against other currencies. Given the history of cryptos over the past decade, this is not a scenario to bet against.

The second of the IMF’s specious allegations is that adopting crypto would create a money laundering risk. Again, there are two rebuttals here. First of all, it is becoming increasingly clear that cryptocurrency has limited use for money laundering, because although it cannot be stopped, it is also easy to trace. Criminals themselves know that: Criminal activity on crypto networks decreased by 57% from 2019 to 2020, from a tiny $ 4.5 billion to an even tinier amount of $ 1.9 billion , according to CipherTrace, while the value of cryptos as a whole has more than doubled.

The second rebuttal, to engage in some whataboutism, is that normal banks handle the request for money laundering very well. The United Nations has estimated that $ 800-2 trillion in proceeds from crime is cleaned up and stashed at the top every year, 33% more than the total circulating supply of all cryptocurrencies in existence today.

The IMF is also waving the flag of environmentalism by citing criticism of the electricity demand for cryptocurrencies. The debate over bitcoin mining and fossil fuel emissions is certainly thorny and important, and crypto that has less of an impact on the environment should be an industry focus. But criticism borders on the offensive when used as a baton to discipline developing countries. The advanced economies that control the IMF have spent decades creating the climate mess we find ourselves in. For them to turn around and use their own sins as a club to prevent smaller, less developed and above all much less polluting countries from making their own monetary decisions crosses the line from illogical to sadistic.

Real crypto problems

The IMF cites two real issues with using crypto as a national currency, although even one of them is irrelevant to the case of El Salvador, which sparked all the criticism in the first place.

The IMF rightly points out that adopting a global cryptocurrency as its national currency would deprive a country of the ability to set its own monetary policy. A normal national currency supply is expanded according to the needs of the economy, which is often important for sustaining economic growth.

But El Salvador has not had control over its money supply for decades. Its main national currency since 2001 has been the US dollar. Seven other countries also use the dollar as their official currency, most being either very small or struggling with a legacy of political instability. The list includes not only El Salvador, but also East Timor, Ecuador, Guam, Marshall Islands, Palau, Panama and Zimbabwe. In theory, the dollar poses an even greater risk to third-party adopters than bitcoin, as the dollar can be militarized in various ways for the benefit of the United States. No less a crypto critic than British economist Frances Coppola has argued (in these pages) that a shift to a neutral currency like bitcoin could be an improvement in stability for dollarized countries.

The second valid argument put forward by the IMF is simply that people need access to the Internet to use crypto, and that access is quite limited around the world. Only about 60% of the world’s population have mobile or wired internet access, and this is significantly lower in the same developing or unstable countries most likely to benefit from adopting a dollar alternative.

Again, however, this does not fully apply to El Salvador, as it keeps dollars in circulation alongside bitcoin, thus solving the problem of daily payments. Generally speaking, such a dual currency system could mean that bitcoin would only be used on a semi-regular basis, for remittances or international payments, by ordinary citizens. This is even more true of the possible use of bitcoin as a national reserve, as it is the province of central banks that likely have decent broadband.

But it is nonetheless true that access limitations mean that adopting a purely digital currency system would not be fair in most countries. So maybe one in five valid arguments isn’t that bad.

What is really going on here?

It may seem confusing that the IMF throws so much thoughtless rhetorical spaghetti at the wall, as if only to see what sticks. In the most generous interpretation, this is a deeply conservative institution whose instinctive opposition to change can play a useful role in moderating any rushed movement toward national adoption of cryptocurrencies.

But to play this role credibly, the IMF will have to try to be much more subtle in its criticisms. For now, his opposition to the growth of an alternative financial system has so little substance that it appears to be nothing more than a very powerful institution defending its territory.

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