On 7th September, 2021, the crypto space reached a watershed moment in its history. El Salvador became the first country to adopt bitcoin as a legal tender. Though remarkable in what it means to a decentralized open-source future, the decision wasn’t welcomed well by traditional institutions like the International Monetary Fund (IMF).
The global development bank, IMF, declared that the bitcoin adoption move would run into “many macroeconomic, financial and legal issues.” The veiled threat could amount to a possible withhold of El Salvador’s $1 billion loan negotiation with the IMF.
Red Flags raised by the IMF hold ground?
In a recent informal blog post titled, Cryptoassets as National Currency? A Step Too Far, IMF cautioned nations against adopting bitcoin.
The IMF conceded that cryptos are faster and cheaper payment systems even across borders. Bitcoin also enables massive financial inclusion. However, they’ve raised 4 major possible roadblocks in bitcoin becoming a viable legal tender.
But are the high-level critiques against crypto truly ‘issues’ worth the dime? Let us find out.
Volatility of Bitcoin
Claim: The volatility of crypto assets could have disruptive economic effects. It could make long-term obligations, business pricing, etc. untenable.
Reality: Volatility is a reasonable argument to make against bitcoin as the sole legal tender. However, it is noteworthy that El Salvador is also maintaining the current currency for day-to-day pricing, payments and debts while adding bitcoin as an option.
The nascent price discovery phase for any asset is vulnerable to price swings. As more people embrace crypto assets, it will eventually increase price stability in comparison to other currencies. Buy Bitcoin in India at the best rate.
Claim: “Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes.”
Reality: There is no data to substantiate such claims. It is increasingly clear that cryptocurrency has limited utility for criminals and money launderers because of its easy traceability.
According to CipherTrace, criminal activity of crypto networks reduced by 57% from 2019 to 2020, to a minuscule of $1.9 billion, even while the crypto market value almost doubled crossing the $1 trillion milestone as of March 2020.
Besides, fiat currency is no holier than thou when it comes to money laundering. As per a UN estimate, $800 million to $2 billion worth of criminal proceeds is laundered and hidden each year, 33% more than all the cryptocurrencies in circulation today.
Claim: Ecological implications of adopting crypto assets as a national currency could be dire.
Reality: At present, according to a study by CCAF, bitcoin consumes annual energy equivalent to a small country like Malaysia or Sweden. However, considering the value offered by bitcoin – financial inclusion, hedge against inflation, escape from monetary repression – the energy is extremely well spent.
Besides, as noted by Cathie Wood of Ark Invest, ‘Bitcoin is much more environmentally friendly than the traditional gold mining or financial services sector it seeks to replace’. Also, bitcoin mining is fast migrating to renewables.
Claim: Adopting a global cryptocurrency as a national currency would render the nation incapable of handling its own monetary policy.
Reality: The IMF has rightly raised the issue of monetary policy sovereignty. But what IMF misses is, smaller nations like El Salvador and modern colonies like Congo and Niger (controlled by developed countries like France with the backing of the IMF) have little to no control over their money supply for decades.
El Salvador and 7 other countries have used the American Dollar as their official currency. Moving to a neutral currency like bitcoin could indeed bring about stability to dollarized nations. Check the everyday BTC to INR rate.
What’s really the matter with the IMF?
An institute like the IMF, a vanguard of the traditional financial system, is bound to guard its turf. Cryptocurrency, bitcoin largely, is emerging as a key threat to existing norms. As experts have indicated, IMF’s objection to bitcoinization could be less about cryptocurrencies and more about the institution losing influence.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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