Does the IMF have a hidden script for El Salvador’s bitcoin game?

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On January 25, the administrators of the International Monetary Fund (IMF) asked El Salvador to “reduce the scope” of its Bitcoin law by “removing the legal tender of Bitcoin”. Adopting a cryptocurrency like the Central American country has “carries significant risks to financial and market integrity, financial stability, and consumer protection,” the fund wrote.

Why did the IMF ask El Salvador to end its cryptocurrency experiment? Certainly, this small country – ranked 104th globally in terms of gross domestic product (GDP) – is not a threat to the balance sheet of the international bank. Additionally, 70% of El Salvador’s population is unbanked and one-fifth of its GDP comes from remittances from the United States. Arguably, he could profit from using Bitcoin (BTC).

Then again, it’s only been six months since El Salvador declared Bitcoin legal tender – the first nation in the world to do so. Is that really enough time to draw useful conclusions?

One of the objectives of the IMF is “to ensure trade [rate] stability,” Gavin Brown, an associate professor of financial technology at the University of Liverpool, told Cointelegraph. Bitcoin and cryptocurrencies have generally shown extreme volatility, as evidenced by the recent 50% decline in November market record prices. “This clearly mandates the IMF to be at best cautious about volatile monetary alternatives such as Bitcoin.”

Other reasons

But that may not be the whole story. “The material impact of such a nation pivoting to Bitcoin as they have is not in itself a big deal,” Brown continued. “However, what is important is the signal it sends to other nations if they [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 ensured the primacy of the dollar.” Bitcoin and, by extension, El Salvador do not yet pose a direct threat to this. “But the key word here is ‘still’. Other nations may have their heads turned by Bitcoin and El Salvador as a result.

Others weren’t surprised that the IMF was asking the country to abandon its legal tender experiment. “It does not surprise me that the IMF makes this request to El Salvador for several reasons,” David Tawil, chairman and co-founder of ProChain Capital, told Cointelegraph.

As the global lender of last resort to sovereign nations, the IMF seeks to have fewer borrowers, not more, Tawil said. Moreover, El Salvador does not have a particularly stellar record with the IMF and capital markets in general. But there could also be something more self-serving behind it, he suggested, adding:

“It is possible that if Bitcoin becomes a strong global reserve currency, the IMF will be seen as much less effective and necessary.”

Additionally, the risks listed in the fund’s Jan. 25 statement, including financial stability, “do not appear to be a compelling enough reason, given that there is very little evidence of the widespread use of Bitcoin for day-to-day transactions in El Salvador”. Syed Rahman, partner at Rahman Ravelli law firm, told Cointelegraph.

What prompted the fund to act then? “The IMF is clearly reacting to recent market volatility,” Rahman said. Given the lower prices and the apparent decline in investor demand for BTC, “it is unclear whether the current structure attracts a recurring source of liquidity” in the mind of the IMF.

Pioneer or renegade

But maybe the IMF knows what it’s talking about. What if Salvadoran President Nayib Bukele was more stumbling than seeing and his country’s grand experiment was just a giant blunder?

“The El Salvador experience didn’t go very well,” Tawil admitted. Technical issues have surfaced and Bitcoin’s recent market price drop hasn’t helped. “El Salvador is not a model for a strong and flourishing economy. So, there was not likely to be a long line of followers behind El Salvador.

“I don’t see any evidence that bitcoin adoption has been successful,” said John Hawkins, senior lecturer at the Canberra School of Politics, Economics and Society, University of Canberra, “so I think there’s little likely that many, if any, countries will follow.

A possible exception might 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 d adopt bitcoin.

There has also been no increase in foreign investment in El Salvador since September, when BTC became legal tender, Hawkins continued. “President Bukele promised that it would add 25% to El Salvador’s GDP.” This does not happen.

An adoption rate of 84%?

On the other hand, a report by Ark Investment Management released in late January said that crypto adoption had skyrocketed in the country. “An estimated 3.8 million people use El Salvador’s bitcoin wallet, Chivo, suggesting an 84% adoption among eligible citizens.” More people now have Bitcoin wallets than traditional bank accounts (1.9 million), the report notes.

Hawkins was unimpressed. Salvadorans who took President Bukele’s advice about holding Bitcoin instead of dollars would have lost a significant portion of their savings, he told Cointelegraph, adding:

“It’s no surprise that a lot of people wanted a Chivo wallet because it came with $30 free. Reports suggest that many people just withdrew the $30 and haven’t used the wallet since.

Ark Investment also noted that Chivo made daily remittances of $2 million in October 2021, “representing approximately 12% of El Salvador’s $6 billion in annual remittances and more than 2% of its GDP. “. The country’s bitcoin game has provided its citizens with unprecedented financial opportunities, said Cathie Wood, CEO of Ark.

“El Salvador will hopefully continue its experiment,” Tawil told Cointelegraph, predicting that it would “achieve slow but significant success.” And, the Bitcoin price will rise again. Indeed, in the long term:

“El Salvador is perhaps the most important first driver for the sector.”

Yet, isn’t there a price to pay if El Salvador continues to flout IMF guidelines? “It doesn’t matter what the IMF says,” Hawkins said. “Even if you don’t respect their expertise, El Salvador asked them for a loan.” Dissolving the fund and taking actions that the multilateral bank considers risky makes it more difficult for El Salvador to obtain this loan.

A hidden agenda?

What about this idea 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,” Tawil said. “I think the IMF is a self-serving agency and probably as corrupt as other world governing bodies, such as the International Olympic Committee.”

Hawkins disagreed. “I don’t think the IMF is motivated by protecting banks. They are concerned about the welfare of the people of El Salvador and also want El Salvador to be able to repay IMF loans.

The IMF has taken a “rather aggressive approach” to cryptocurrency-related products, Rahman commented, but the current volatility affects all markets, not just cryptocurrencies. “It should also be noted that El Salvador’s relations with the United States have deteriorated, and one could infer that this is a contributing factor.”

What about the timing of the IMF message, why now? The fund has been critical of the El Salvador BTC experiment from the start, Tawil said, but “the current Bitcoin price pullback allows the IMF to shout ‘I told you so’ and have extra strength behind its opinion. “.

Bukele was notably buying more BTC during the last crypto drawdown. “Most people enter when the price is up,” he tweeted on Jan. 24, “but the safest and most profitable time to buy is when the price is down. Wizard.

Read the future

The IMF’s demands on El Salvador over 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] asking a pioneering sovereign nation to abandon a forward-looking financial policy that attempts to extricate it from financial instability and dependence on another country’s currency.

It should also not be forgotten that the headquarters of the IMF is in Washington, DC, that the United States is a founding member and that the United States is also the largest contributor to the international institution, which has 190 member countries. . “The fortunes and interests of the IMF and the United States are therefore arguably inextricably linked,” Brown told Cointelegraph.

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