There is no sunlight in this crypto season, so it may seem strange to present the “Bitcoin is legal tender” argument again. That is, will or should any country – with the exception of El Salvador and the Central African Republic (CAR), which have already done so – declare Bitcoin (BTC) as their official national currency?
The International Monetary Fund (IMF) raised the issue again last week in a paper that published nine crypto-focused policy actions to be adopted by its 190 member countries. First on the list of “don’ts” is raising crypto to “legal tender.” Or, as the executive board of the multilateral lending institution assesses:
“Directors generally agree that crypto assets should not be given official currency or legal tender status in order to maintain sovereignty and monetary stability.”
Maybe it’s not fair to ask crypto again, but is the IMF right to warn member banks about cryptocurrencies? And if so, what exactly is lacking in the composition of private digital money that makes it unsuitable as an official national currency? Maybe it’s the well-documented volatility of Bitcoin, but if it’s small, the oldest cryptocurrency in the world can’t still grow into a new role as an additional script – perhaps in a few years when it has more users, more liquid, and less exhibition. price variation?
The IMF should be careful
“The mandate of the IMF is to promote the stability and growth of the global economy. It is therefore reasonable that the IMF has recently advised countries not to grant the status of legal tender to crypto assets, which, by design, often interfere with nature,” said Gavin Brown, professor of financial technology at the University of Liverpool. Cointelegraph. “These disruptions may present as many opportunities as threats, but the IMF must tread a more prudent course in the face of open uncertainty.”
“There are very good economic reasons why most countries don’t want to use cryptocurrencies like BTC as local scrip,” James Angel, associate professor at Georgetown University’s McDonough School of Business, told Cointelegraph. “In short, they don’t want to lose the profits from printing their own money or the economic control over the economy that fiat currency provides.”
While crypto maximalists can skewer the government for printing money non-stop for paper over the deficit, “sometimes, the right thing to do is to print money,” added Angel, “like in the Great Recession or a pandemic. The trick is not to print too much, that’s what happened in a pandemic.
‘Bitcoin was made for the Global South’
In its policy paper, the IMF has several arguments for its position beyond the well-documented volatility of crypto. It can expose government revenues to foreign exchange risk. Domestic prices “could become very volatile” as businesses and households will spend time deciding whether to hold fiat or BTC “as opposed to engaging in productive activities.” Governments should allow citizens to pay taxes in Bitcoin – and more.
Adopting crypto as legal tender can even affect the government’s social policy goals, the IMF paper states, “especially for unsupported tokens, as high price volatility can affect poor households.”
But the question remains. Although the IMF’s argument is valid and holds true in many situations, aren’t there exceptions? What about developing countries struggling with currency inflation, like Turkey?
“Bitcoin was created for the Global South,” Ray Youssef, co-founder and CEO of Paxful – and founder of the Built With Bitcoin Foundation – told Cointelegraph. “In the West, a lot of attention is given to the suspected volatility of Bitcoin. It is because the world uses the dollar and the West is protected from global inflation. Currently, Turkey has an inflation rate of more than 50%, and Nigeria has an inflation rate of more than 20% – in these economies, Bitcoin is a strong bet.
But even in a case like this, it may not be easy. “For cryptocurrency to be effectively used as legal tender in developing countries, governments will [still] need to invest heavily in technology infrastructure and the appropriate regulatory framework,” Syedur Rahman, a partner at law firm Rahman Ravelli, told Cointelegraph. If this can be done, “it will help financial inclusion.”
“Adopting a foreign/hard currency or monetary standard is the last resort to control hyperinflation,” commented Angel. “But even a weak government likes to have the power of the printing press, because it provides a mechanism of taxation to pay for the troops.”
The Central African Republic made crypto legal tender in April 2022 – the second country to do so, after El Salvador. Some representatives of the CAR said that crypto will help reduce costs for financial transactions inside and outside the country. Maybe also, is a valid reason to raise crypto to official currency.
Rahman admitted that “there are benefits such as reducing transaction costs for financial transactions. If there is a weak traditional banking system or a lack of trust, then cryptocurrency can certainly provide a payment alternative.
“Remittance is a great use case for Bitcoin,” Youssef said. “Money transfer companies charge high fees and funds can take days.” Bitcoin reduces costs, and transactions can take minutes. People without bank accounts can also take advantage of remittances. “This is a big problem when we look at the amount of remittances to some countries. In El Salvador, remittances are more than a quarter of the country’s GDP.
However, others refused. “I think the status of legal tender in this context may be a gimmick. I’m not sure how we can be more motivated to send BTC to people living in CAR just because BTC is now considered legal tender in that jurisdiction,” David Andolfatto, head of the department of economics and professor at Miami University of Miami Herbert Business School. , told Cointelegraph.
In addition, the act of granting the legal tender status of “foreign” currency “seems to me to be an acknowledgment that state institutions cannot be trusted to manage society effectively,” added Andolfatto, former senior vice president of the Federal Reserve Bank of St. Louis where he was one of the first central bankers in the world to give a public lecture on Bitcoin in 2014.
Bitcoin remains in doubt as legal tender because it cannot overcome the so-called “flight-to-safety” phenomenon, where the demand for money changes violently with sudden changes in consumer or business sentiment, Andolfatto explained.
“Rough swings at this price level are unnecessary […] What is needed is a monetary policy that expands the money supply to accommodate the demand for money in times of stress. Provision of ‘elastic currency’ to stabilize price levels to benefit the economy as a whole.
“Transaction costs are a friction in global economic activity,” Brown said, and developing countries often bear the brunt of these inefficiencies. Still, “In my opinion, a pivot to crypto assets, such as in El Salvador today, is too big a risk to take,” Brown said. Georgetown’s Angel added, “El Salvador and CAR are special cases because they don’t have their own currency to begin with.”
More maturity
Bitcoin is still relatively young and volatile. But with more adoption, including by institutional investors, couldn’t it become a stable asset, more like gold? “There is some merit to this argument,” Andolfatto said. “I believe BTC price volatility will decrease as the product matures.” But even if BTC remains stable for a long time, “it will always be vulnerable to the ‘flight-to-safety’ phenomenon that will generate a sudden large deflation – or inflation if people spend BTC,” he added. “BTC will appear stable, but will remain fragile.”
Youseff, like several others, suspects the IMF has an ulterior motive in all this. The fund is interested in self-sustainability, he suggested, adding:
“Bitcoin has proven to reduce inflation, give more access to the economy and international work, increase transparency and act as a universal money translator. It also has the potential to reduce the country’s dependence on international centralized powers – like the IMF. It is not difficult to connect the dots why the IMF does not accept Bitcoin.
“Cryptoassets such as Bitcoin are still young in terms of currency,” noted Brown, but weaknesses like price volatility and pseudo-anonymity can present “insurmountable challenges from the perspective of countries. However, Bitcoin has become a backstop alternative when fiat currencies fail through macroeconomic events such as hyperinflation and controls on capital flight.
If not a leader, is it still a supporting role?
For the sake of argument, let’s agree with the IMF, crypto skeptics and others that there is no future role for Bitcoin as legal tender or official currency – even in developing countries. What still prevents BTC and other cryptocurrencies from playing a useful global social or economic role?
“I see a very useful role for crypto technology, which is why I am a vocal supporter of CBDC [central bank digital currencies] since 2014,” answered Angel. “There’s a good reason why more than 100 central banks are working on this.”
But he is skeptical about Bitcoin because “the government has a long history of getting rid of private money. I am surprised that it took so long for the government to react and try to get rid of Bitcoin to get all the seigniorage income for itself.
Overall, crypto assets such as Bitcoin can continue to be “held in limbo by many nation states and regulators,” opined Brown, because they are inherently anti-establishment but also “close to impossible” to ban in a free society.
Bitcoin and other digital assets can still play a positive role as a “trigger to force monopolies, which are central banks,” to rethink monetary policy “and to innovate in response,” said Brown.