The International Monetary Fund (IMF) has asked El Salvador to stop treating Bitcoin as legal tender. The country’s finance minister firmly rejects this: the country’s Bitcoin policy is a success story. The IMF cannot deny this entirely. But why would he want Bitcoin to be stripped of its legal tender status in the first place?
El Salvador rejects International Monetary Fund (IMF) request to no longer treat Bitcoin as legal tender.
The small Latin American country’s finance minister, Alejandro Zelaya, told a local TV station “angry” that El Salvador’s bitcoin policy is none of the IMF’s business: “Countries are sovereign nations and make sovereign decisions about their public policies.”
On January 25, the IMF published a press release on negotiations with El Salvador. She praised the strong recovery of the Salvadorian economy after the Corona crisis and the country’s handling of the pandemic: the economy shrank by 7.9 percent in 2020, but grew by an estimated 10 percent in 2021. For 2022, the IMF expects growth of 3.2 percent. And compared to its neighbors, El Salvador has by far the lowest number of corona deaths.
However, the institution is concerned about the country’s growing debts, high interest rates and, above all, the country’s Bitcoin policy : “The adoption of Bitcoin as legal tender entails major risks for the integrity of finance and markets, as well as for the stability of the financial system and consumer protection.”
Therefore, among other things, the IMF asked El Salvador to remove Bitcoin’s status as legal tender from the Bitcoin Act. In doing so, he repeats the warnings of other international bodies, such as the FATF , the World Bank and the United Nations .
Is the IMF pursuing symbolic politics?
The big question here is: why does the IMF want El Salvador to stop treating bitcoin as legal tender?
It would be understandable for the IMF to be unhappy with El Salvador’s President Nayib Bukele using government finances to ‘buy the dip ‘ (effectively making a loss). It is also understandable when the IMF demands that El Salvador monitor and regulate the ecosystem.
But what’s the problem with legal tender status? From a purely pragmatic point of view, this changes nothing: As in most free countries, merchants in El Salvador can accept bitcoins and customers can pay with bitcoins. However, there is no obligation for merchants to accept Bitcoin. El Salvador maintains a bitcoin fund and invests money in bitcoins, which no other country has done so far, but is possible for everyone. The legal status of Bitcoin is irrelevant.
So why is this so important to the IMF and El Salvador? Is it purely symbolic politics?
We look at a more than 100-page report in which the IMF describes in detail the status of the negotiations with El Salvador. In this report, the word Bitcoin appears 200-300 times. That alone shows how important the issue is for both parties.
The Successes of Bitcoin Policy
First, the IMF summarizes the status of El Salvador’s Bitcoin policy. With 3.8 million users, the Chivo wallet has achieved impressive market penetration in the nation of 6.5 million people, although the reality in the country doesn’t always match those numbers.
The short-term costs of bitcoin policy – for example for the development of the wallet or the bitcoin fund – amount to 1 percent of national income. That sounds like a lot, but it’s only a fraction of the revenue that El Salvador expects: 25 percent of national income. The Bitcoin policy will attract more tourists, which will significantly reduce fees for remittances and encourage consumption.
That sounds like an admirably favorable cost/return ratio. Even if El Salvador tweaks the numbers a bit. The IMF also recognizes that wallets like Chivo “have the potential to make payments more efficient, thereby improving financial inclusion and driving growth.”
A threat to the dollar order?
Nevertheless, the enthusiasm of the institution remains cautious: “There are significant risks in the use of Bitcoin. It should not be treated as an official currency with legal tender status.”
The high volatility makes Bitcoin unsuitable as a means of payment, a unit of account and a store of value. The country’s bitcoin policy introduces “significant risks” to, as I said, market integrity, consumer protection and financial stability. The fund that El Salvador is using to help traders exchange bitcoin for dollars creates another potential risk.
Furthermore – and perhaps this is where we get to the heart of the matter – a significant increase in the use of Bitcoin could “threaten the system of dollarization, which has proven to be a successful nominal anchor for the economy.”
Is it about that? In the purely factual representation of the IMF, El Salvador takes on a manageable risk in order to generate considerable additional income. Does the IMF rather mind that Bitcoin is threatening the dollar as the reserve currency of El Salvador – and possibly in all of Latin America? Does the IMF fear that “ cryptoization ” will jeopardize the global monetary policy system it runs?
You don’t have to interpret this in a negative conspiracy theory: The IMF is probably not interested in gaining power in any way, strengthening the USA or enslaving developing countries. Rather, one can assume that the organ is honestly concerned about what will happen to the world economy if its usual monetary system crumbles.
Agree on the specifics
The negotiations between the IMF and El Salvador appear to be marked by a strange gulf between specific details and fundamental issues. The IMF’s call to withdraw Bitcoin’s status as legal tender seems more symbolic and principled. In contrast, the regulatory wishes of the institution appear concrete and pragmatic.
El Salvador should regulate the Chivo wallet and other Bitcoin service providers more strictly. The country should also monitor the ecosystem and transactions more closely.
In addition, the IMF recommends that the FIDETBITCOIN fund, with which El Salvador ensures the exchange of Bitcoin and dollars, be analyzed very carefully and reconsidered because of the great risks. The institution also warns the country against introducing further risks with the Bitcoin Bond .
El Salvador’s negotiators were quite willing to compromise on these issues. They agreed to consider whether and how to tighten oversight of Chivo and the Bitcoin ecosystem. They also stated that they would monitor the development of bitcoin policy very closely and adjust the bitcoin law if necessary.
Bitcoin accomplished in months what years or even decades of IMF policy failed to accomplish
However, the two parties did not reach a compromise on the fundamental question: Bitcoin – yes or no? Legal tender – yes or no?
The Salvatorian negotiators explained how successful the Bitcoin policy is already in driving financial inclusion and the digitization of payments.
In just two months, Bitcoin has managed to integrate 60 percent of the population into the financial system, while two decades of banking has only managed to do so for 23 percent. You have to let this relationship melt in your mouth. Bitcoin accomplished in months what years or even decades of IMF policy failed to accomplish.
El Salvador anticipates numerous benefits from the increasing use of Bitcoin. First, when Salvadoran migrant workers, such as those in the US, send money back to their families with bitcoin wallets, they save significant fees.
Second, branding El Salvador as a bitcoin nation helps “upscale tourism and private investment revenues.” There are strong synergies between bitcoin and tourism, and there is also great investor interest in mining and renewable energy.
There are also risks associated with bitcoin. However, these are currently still very limited, especially in comparison with the political successes. Therefore, and Finance Minister Zelaya emphasizes this “angrily”, changing the law is currently out of the question. Bitcoin remains legal tender.