The crypto winter has been long and dark, yet the question of Bitcoin (BTC) as a legal tender still persists. Will or should any country, apart from El Salvador and the Central African Republic (CAR) who have already done so, declare Bitcoin (BTC) an official national currency?
The International Monetary Fund (IMF) raised this issue again last Wednesday in a paper proposing nine crypto-focused policies for its 190 member countries to adopt. The first on its list of “don’ts” was to not make crypto a legal tender. Their executive board assessment stated:
“Directors generally agreed that crypto assets should not be granted official currency or legal tender status in order to safeguard monetary sovereignty and stability.”
It may not be the kindest of times to bring up the topic again, but was the IMF right in cautioning its member banks against cryptocurrencies? And if so, what makes private digital money unfit for use as an official currency? Could it be Bitcoin’s historically notorious volatility? If this is the case, can the world’s oldest crypto still grow into a new role as an auxiliary scrip in the future, with more users, higher liquidity, and lesser price variance?
The IMF Has to Move with Care
“The IMF is responsible for promoting global economic development and stability. It is therefore reasonable that the IMF has recently advised countries to avoid granting legal tender status to crypto-assets, which are, by nature, often disruptive,” Gavin Brown, Associate Professor in Financial Technology at the University of Liverpool, told Cointelegraph. “Such disruption brings both opportunities and threats, but the IMF must take a more moderate course when facing such open-ended uncertainty.”
“There are very good economic reasons why most countries would not want to adopt cryptocurrencies like BTC as their local scrip,” James Angel, Associate Professor at Georgetown University’s McDonough School of Business, told Cointelegraph. “In short, they don’t want to give up the money they make from printing their own currency or the economic control that fiat currencies provide.”
Although crypto maximalists could be inclined to suggest governments to print more money in lieu of deficits, Angel notes that “sometimes, the right thing to do is to print currency, such as during the Great Recession or the pandemic. The trick is not to print too much, which happened during the pandemic.”
‘Bitcoin was Designed for the Global South’
The IMF paper also listed multiple arguments for its position beyond crypto’s well-documented volatility. Foreign exchange rate risk could put government revenues at risk, domestic prices “could become highly unstable”, businesses and households would spend time deciding whether to use fiat money or Bitcoin instead of engaging in productive activities, governments could allow citizens to pay taxes in Bitcoin — and so forth.
Making crypto a legal tender could also have an effect on a government’s social policy objectives, the IMF paper stated, “particularly for unbacked tokens, as their high price volatility could affect poorer households more.”
That said, could there be any exceptions? What about countries in developing nations that struggle with inflationary currency, such as Turkey?
“Bitcoin was created for the Global South,” Ray Youssef, Co-founder and CEO of Paxful — and a founder of the Built With Bitcoin Foundation — told Cointelegraph. “In the West, a lot of attention is paid to the alleged volatility of Bitcoin. That’s because the world runs on the dollar, and the West is sheltered from global inflation. Right now, Turkey has an inflation rate of over 50%, and Nigeria has an inflation rate of more than 20% — in these economies, Bitcoin is a sound bet.”
But it may not be possible even in such scenarios. “For cryptocurrency to be used effectively as legal tender in developing countries, governments will need to invest significantly in the technological infrastructure and suitable regulatory framework,” Syedur Rahman, Partner at Rahman Ravelli law firm, told Cointelegraph. If this is possible, it “will help promote financial inclusion.”
“Adopting a foreign/hard currency or monetary standard is a last resort to counter hyperinflation,” added Angel. “But even weak governments like to have the power of the printing press, as it provides them a way to collect taxes to pay their troops.”
The Central African Republic adopted crypto as a legal tender in April 2022, becoming the second country to do so after El Salvador. Some representatives of CAR said that crypto would reduce fees for financial transactions both within and outside the country. Could this be a valid reason for elevating crypto to an official currency?
Rahman acknowledged that “there are certainly benefits such as seeing a reduction in fees for financial transactions. If there is a weak traditional banking system or lack of trust, then cryptocurrency can offer an alternative means of payment.”
“Remittance costs are also a big part of the picture,” continued Brown, “and a more efficient digital payment infrastructure could help reduce these costs.”
What is the future of Bitcoin as a legitimate currency? That is the question being posed by the International Monetary Fund (IMF) after the Central American Republic of El Salvador approved the world’s first legislation to recognize Bitcoin as legal tender.
The move has been met with a range of reactions from the crypto community, with some praising El Salvador’s bold decision and others questioning the practicality of using Bitcoin as a legal currency.
Youssef Badri, CEO of a blockchain-based remittances platform, welcomed the news. “Remittances is a great use case for Bitcoin. Money transfer companies charge high fees and funds can take days to arrive. Bitcoin transactions can be completed in minutes and fees are reduced. People without bank cards can access remittances,” he said.
However, Professor David Andolfatto of the University Of Miami’s Miami Herbert Business School was less enthusiastic. “I think legal tender status in this context is likely a gimmick. I’m not sure how I might be more motivated to send BTC to someone living in CAR just because BTC is now viewed as legal tender in that jurisdiction,” he said.
Andolfatto also noted that the volatility of Bitcoin prices could make it a risky proposition as a currency. “These violent swings in the price level are unnecessary […] What is needed is a monetary policy that expands the supply of money to accommodate the demand for money in times of stress. The provision of an ‘elastic currency’ serves to stabilize the price level for the benefit of the economy as a whole,” he explained.
Georgetown’s John Angel echoed this sentiment. “In my view, a pivot to crypto assets, such as in El Salvador today, is a risk too big to take,” he said.
But with the growing adoption of Bitcoin, could it become a more stable asset, like gold? Andolfatto believes that as the industry matures, the volatility of Bitcoin will decrease. But he also warned that it would still be susceptible to “flight-to-safety” phenomena.
Youssef believes that the IMF’s reluctance to embrace Bitcoin could be due to its potential to disrupt the status quo. “Bitcoin has proven to lower inflation, give more people access to the economy and international work, increase transparency and act as a universal translator of money. It also has the potential to lessen a country’s reliance on international centralized power — like the IMF. It’s not hard to connect the dots on why the IMF is not welcoming of Bitcoin,” he said.
So, while Bitcoin may not become a global currency, it could still have a positive economic and social role. “I see a very useful role for crypto technology, which is why I have been a vocal proponent of CBDCs [central bank digital currencies] since 2014,” Angel said.
Ultimately, Bitcoin could be the impetus for governments to rethink their monetary policies. As Brown noted, ” Bitcoin has become a backstop alternative when fiat currencies fail through macroeconomic events such as hyperinflation and controls around capital flight.”
So, is Bitcoin a viable currency or just a gimmick? It looks like the jury is still out.
