Is there a screenplay in the IMF’s vault for El Salvador’s Bitcoin drama?

What happens if El Salvador’s Bitcoin experiment proves to be a success? Is this really what the IMF is afraid of?

The directors of the International Monetary Fund (IMF) requested that El Salvador “limit the scope” of the Bitcoin Law by “removing Bitcoin’s legal tender status” on January 25. The fund warned that adopting a cryptocurrency, as the Central American country has, “involves significant risks to financial and market integrity, financial stability, and consumer protection.”

Why did the International Monetary Fund (IMF) force El Salvador to basically end its bitcoin experiment? Surely, this small country, which ranks 104th in the world in terms of GDP, poses no threat to the international bank’s balance sheet. Furthermore, 70 percent of El Salvador’s population is unbanked, and remittances from the United States account for one-fifth of the country’s GDP. It is possible that it will profit from the use of Bitcoin (BTC).

After all, it’s only been six months since El Salvador, the world’s first country to do so, made Bitcoin legal tender. Is there really enough time to draw any useful conclusions in that amount of time?

“Ensure exchange [rate] stability” is one of the IMF’s goals, according to Gavin Brown, an associate professor of financial technology at the University of Liverpool. Bitcoin and cryptocurrencies in general have been extremely volatile, as evidenced by the recent 50% drop in market values from November’s all-time highs. “This certainly indicates that the IMF should be wary of volatile monetary alternatives like Bitcoin.”

Other considerations

However, this may not be the entire storey. “The material consequence of such a country switching to Bitcoin as they have is not a big problem in and of itself,” Brown continued. “What is essential, though, is the signal that this sends to other nations if they [El Salvador] succeed.”

Brown pointed out that more than 65 countries already peg their currencies to the US dollar. “This, together with the dollarization of oil and the US economy’s strength, has ensured the dollar’s primacy.” El Salvador and, by extension, Bitcoin are not yet a direct threat. “However, the keyword is ‘yet.'” Other countries’ heads may be swayed by Bitcoin, and El Salvador may suffer as a result.”

Others were unsurprised by the IMF’s request that the country abandon its trial with legal tender. “It comes as no surprise to me that the IMF is requesting this of El Salvador for a variety of reasons,” said David Tawil, president and co-founder of ProChain Capital.

According to Tawil, as the world’s lender of last resort to sovereign nations, the IMF prefers to have fewer, not more, borrowers. El Salvador also doesn’t have a good track record with the IMF and capital markets in general. But, he added, there could be something more self-serving underlying it as well.

“It’s possible that the IMF may be regarded ineffective and unnecessary if Bitcoin becomes a powerful global reserve currency.”

Furthermore, the risks listed in the fund’s Jan. 25 statement, such as 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,” according to Syed Rahman, a partner at law firm Rahman Ravelli.

What prompted the fund to take action in the first place? “The IMF is certainly reacting to the current market turbulence,” Rahman remarked. In the IMF’s opinion, “it’s not clear if the existing structure is drawing a recurrent supply of cash” given the price decline and apparent drop in investor interest for BTC.

Whether you’re a trailblazer or a renegade, you

However, it’s possible that the IMF knows what it’s talking about. What if Salvadoran President Nayib Bukele is a bluffer rather than a seer, and his country’s grand experiment is a colossal flop?

“El Salvador’s experiment hasn’t gone well,” Tawil said. Technical issues have surfaced, and Bitcoin’s recent price decline hasn’t helped matters. “El Salvador isn’t exactly the model kid for a prospering economy. As a result, there was never going to be a huge line of supporters behind El Salvador.”

“I don’t see any indication that Bitcoin adoption has been successful,” John Hawkins, senior lecturer at the University of Canberra’s Canberra School of Politics, Economics and Society, told Bitcoinsupports, “therefore I believe it’s doubtful that many, if any, countries would follow.”

One possible exception, Hawkins suggested, may be countries where hyperinflation has caused a loss of confidence in the national currency, such as Venezuela, “although even there, dollarization or a currency board would be a better alternative” than Bitcoin adoption.

Neither has there been a spike in foreign investment in El Salvador since BTC became legal tender in September, according to Hawkins. “President Bukele promised that it would boost El Salvador’s GDP by 25%.” That has not occurred.

An adoption rate of 84 percent?

In contrast, a research released by Ark Investment Management in late January stated that crypto use has increased in the country. “El Salvador’s Bitcoin wallet, Chivo, is used by an estimated 3.8 million people, implying an 84 percent acceptance rate among eligible citizens.” According to the report, there are currently more Bitcoin wallets (1.9 million) than regular bank accounts.

Hawkins was underwhelmed. President Bukele told Bitcoinsupports that Salvadorans who followed his recommendation to hold Bitcoin instead of dollars would have lost a considerable amount of their wealth.

“It’s understandable that many people desired a Chivo wallet because it came with a free $30. According to news reports, many folks simply withdrew the $30 and haven’t touched the wallet since.”

As of October 2021, Chivo was settling $2 million in remittances daily, “accounting for nearly 12 percent of El Salvador’s $6 billion in yearly remittances and more than 2% of its GDP,” according to Ark Investment. According to Ark CEO Cathie Wood, the country’s Bitcoin play has given its inhabitants unparalleled financial options.

“El Salvador’s experiment will hopefully continue,” Tawil told Bitcoinsupports, predicting that it would “achieve slow but significant success.” And Bitcoin’s price will climb once again.” In the long run, it is true:

“El Salvador could be the sector’s most crucial first mover.”

Isn’t there a cost to El Salvador’s continued defiance of IMF directives? “What the IMF says is important,” Hawkins remarked. “Even if you don’t trust their judgement, El Salvador has been requesting a loan from them.” Dissing the fund and engaging in dangerous behaviour will only make it more difficult for El Salvador to obtain the loan.

Is there a secret motive here?

What about the idea that the IMF has a hidden agenda and is just opposed to cryptocurrencies because they pose a danger to the US currency and/or the existing global financial system?

“I completely agree,” Tawil added. “I believe the IMF is a self-serving organisation that is likely as corrupt as other global regulating agencies like the International Olympic Committee.”

Hawkins, on the other hand, had a different opinion. “I don’t believe the IMF is motivated by the desire to safeguard banks.” They are worried about the well-being of El Salvador’s citizens and want El Salvador to be able to repay IMF loans.”

According to Rahman, the IMF has taken a “very harsh approach” to cryptocurrency-related goods, but present volatility affects all markets, not just cryptocurrencies. “It’s also worth mentioning that El Salvador’s relations with the US have deteriorated, which may be seen as a contributing cause.”

What about the IMF’s message’s timing, and why now? “The present decline in the price of Bitcoin allows the IMF to scream ‘I told you so’ and have more power behind its position,” Tawil said, adding that the fund has been sceptical of the El Salvador BTC experiment from the beginning.

During the most recent crypto bear market, Bukele was seen buying more BTC. On Jan. 24, he tweeted, “Most people get in when the price is up, but the safest and most profitable time to buy is when the price is down.” It’s not a difficult task.”

The ability to predict the future

In an emailed news statement, deVere CEO Nigel Green stated that the IMF’s demands to El Salvador on Bitcoin “shows the institution to be on the wrong side of history.” “The IMF is urging a forward-thinking sovereign nation to abandon a future-oriented financial policy aimed at rescuing it from financial insecurity and currency reliance on another country’s currency.”

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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