In June, I wrote that El Salvador’s decision to adopt bitcoin as legal tender was “the most significant single development in the history of cryptocurrency so far.” If anything, that was confirmed when the International Monetary Fund, a global development bank closely tied to the world’s richest countries, quickly declared that the move raised “a number of macroeconomic, financial and legal issues.” The statement amounted to a veiled threat, because El Salvador was in negotiations for a $1 billion loan from the IMF. But the IMF at the time didn’t provide any real detail about what “issues” it saw with the national adoption of bitcoin.
This week, we got more insight into what those issues might be.
Well, not really.
What we did get is an IMF blog post titled “Cryptoassets as National Currency? A Step Too Far” that amounts to a laundry list of boilerplate high-level critiques of cryptocurrency. It includes little nuance about their purported weakness as a national currency, though, and is even less specific about El Salvador’s plan. Though it does include some significant points, most of the statement could have been cribbed from a Peter Schiff Twitter rant: Its main arguments include cryptocurrency’s volatility, use for money laundering and electricity demand, which range from irrelevant to outright false.
In fairness, it was an informal blog post meant for a broad audience. But the lack of subtlety from an entity that has huge sway over the well-being of many of the world’s most vulnerable people is disappointing, if not outright frightening. It would seem to reinforce the sense that the IMF’s objection to Bitcoinization is less about the stability of economies daring to innovate than about maintaining the IMF’s own position of power over them.
Fake crypto problems
I’ll dispense briefly with several of the points made in the IMF post. One is that the volatility of cryptocurrencies makes them untenable for long-term debt obligations, or even for short-term applications like business pricing, with disruptive economic effects. This is a reasonable argument against adopting bitcoin as the sole currency of a sovereign nation today.
But it doesn’t address the actual proposal in El Salvador, which would maintain the country’s current currency for day-to-day pricing, payments and debts, while adding bitcoin as an option for both payments and government reserves. This could be seen as a transitional phase. The long game here would theoretically see bitcoin (or another crypto asset) adopted by a growing number of countries, which would eventually increase its stability against other currencies. Given crypto’s track record over the past decade, it’s not a scenario to bet against.
The second of the IMF’s specious claims is that crypto adoption would create money-laundering risk. Again, there are two rebuttals here. First and foremost, it is becoming increasingly clear that cryptocurrency has limited utility for money laundering, because while it’s impossible to stop, it’s also easily traced. Criminals themselves know that: Criminal activity on crypto networks declined 57% from 2019 to 2020 – from a miniscule $4.5 billion to an even more miniscule $1.9 billion, according to CipherTrace – while the value of cryptos as a whole more than doubled.
The second rebuttal, to engage in some whataboutism, is that normal banks handle demand for money laundering just fine. The United Nations estimated that $800 billion to $2 trillion of criminal proceeds is cleaned and hidden each year – at the top end, 33% more than the total circulating supply of all cryptocurrency in existence today.
The IMF also waves the flag of environmentalism by citing critiques of cryptocurrency’s electrical demand. The debate around mining bitcoin and fossil fuel emissions is certainly knotty and important, and crypto that has less of an impact on the environment should be an industry goal. But the critique borders on offensive when it’s being used as a bludgeon to discipline developing countries. The advanced economies that control the IMF spent decades creating the climate mess we find ourselves in. For them to turn around and use their own sins as a cudgel to keep smaller, less developed, and mostly vastly less polluting countries from making their own monetary decisions crosses the line from illogical to sadistic.
Real crypto problems
The IMF does cite two genuine issues with the use of crypto as a national currency – though even one of those is irrelevant to the case of El Salvador, which triggered all the hand-wringing in the first place.
The IMF rightly points out that adopting a global cryptocurrency as a national currency would remove a nation’s 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 to maintaining economic growth.
But El Salvador hasn’t had control of its money supply for decades. Its primary national currency since 2001 has been the U.S. dollar. Seven other countries also use the dollar as their official currency, most either very small or struggling with a legacy of political instability. The list includes not only El Salvador, but also East Timor, Ecuador, Guam, the Marshall Islands, Palau, Panama and Zimbabwe. In theory, the dollar represents even greater risk to third-party adopters than bitcoin does, because the dollar can be weaponized in various ways for the benefit of the U.S. No less a crypto critic than British economist Frances Coppola has argued (in these pages) that switching to a neutral currency like bitcoin could be a stability upgrade for dollarized nations.
The second valid argument mooted by the IMF is simply that individuals need access to the internet to use crypto, and that access is quite limited worldwide. Only about 60% of the world’s population has mobile or hardwired internet access, and that’s significantly lower in the very same developing or unstable nations most likely to benefit from the adoption of a dollar alternative.
Again, though, that doesn’t entirely apply to El Salvador, because it’s keeping dollars in circulation alongside bitcoin, solving the daily payments problem. Broadly, such a dual-currency system could mean bitcoin would be used only semiregularly, for remittances or international payments, by everyday citizens. This is even more true of the possible use of bitcoin as a national reserve, because that’s the province of central banks that probably have decent broadband.
But it is nonetheless true that access limitations mean adoption of a purely digital currency system wouldn’t be equitable in most countries. So maybe one valid argument out of five isn’t so bad.
What’s really going on here?
It may seem puzzling that the IMF would throw so much ill-considered rhetorical spaghetti at the wall, as if only to see what sticks. In the most generous interpretation, it’s a deeply conservative institution whose knee-jerk opposition to change may play some helpful role in moderating any rushed moves into national adoption of cryptocurrencies.
But to play that role credibly, the IMF will have to strive for a lot more subtlety in its critiques. For now, its opposition to the growth of an alternative financial system has so little substance that it seems like nothing more than a very powerful institution defending its turf.
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