Is the IMF closing the door too early on Bitcoin as legal tender?

There has been little sunlight this crypto winter, so it may seem strange to present the “Bitcoin as legal tender” argument again. That is, will or should any country – apart from El Salvador and the Central African Republic (CAR), which have already done so – declare Bitcoin (BTC) as an official national currency?

The International Monetary Fund (IMF) took up the matter again last week in a paper that put forward nine crypto-focused policy actions that its 190 member countries should adopt. First on the list of “don’ts” was elevating crypto to “legal tender.” Or, as the multilateral lending institution’s board assessment put it:

“Directors generally agreed that cryptoassets should not be given official currency or legal tender status to ensure monetary sovereignty and stability.”

Perhaps it is not fair to ask the question with crypto on its heels, but was the IMF right to warn its member banks about cryptocurrencies? And if so, what exactly is missing in the composition of private digital money that makes it unsuitable as an official national currency? Maybe it’s Bitcoin’s well-documented volatility, but if that’s the case, couldn’t the world’s oldest cryptocurrency still grow into a new role as a utility script—perhaps in a few years when it has more users, is more liquid, and shows less price volatility?

The IMF must tread carefully

“The IMF’s mandate is to promote global economic stability and growth. It is therefore reasonable that the IMF has recently advised countries to refrain from granting legal tender status to crypto-assets, which are often disruptive in the first place, said Gavin Brown, associate professor of financial technology at the University of Liverpool. Cointelegraph. “Such disruptions arguably present as many opportunities as threats, but the IMF must tread a more cautious path when faced with such open uncertainty.”

“There are very good economic reasons why most countries don’t 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 lose the profits from printing their own money or the financial control over the economy that fiat currencies provide.”

While crypto maximalists can force governments to print money non-stop to paper over deficits, “sometimes the right thing is to print money,” Angel added, “like in the Great Recession or the pandemic. The trick is not to print too much , something that happened in the pandemic.”

“Bitcoin was made for the global south”

In its policy paper, the IMF had several arguments for its position beyond crypto’s well-documented volatility. This may expose the central government’s revenues to currency risk. Domestic prices “could become highly volatile” because businesses and households would spend time deciding whether to hold fiat or BTC “as opposed to engaging in productive activities.” Governments must allow citizens to pay taxes in Bitcoin – and so on.

Adopting crypto as legal tender could even affect a government’s social policy goals, the IMF paper stated, “especially for unbacked tokens, as their high price volatility could affect poor households more.”

But questions remain. Even if the IMF arguments are valid and hold in most cases, aren’t there exceptions? What about developing countries struggling with inflationary currencies, like Turkey?

“Bitcoin was made 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 focused on the suspected volatility of Bitcoin. It’s because the world runs on the dollar and the West is shielded from global inflation. Right now, Turkey has an inflation rate of over 50%, and Nigeria has an inflation rate of over 20% – in these economies, Bitcoin is a strong bet.

But even in cases like these, it may not be so easy. “For cryptocurrency to be used effectively as legal tender in developing countries, governments will [still] need to invest heavily in the technological infrastructure and an appropriate regulatory framework, says Syedur Rahman, partner in the law firm Rahman Ravelli, to Cointelegraph. If this can be done, “it will help with financial inclusion.”

“Adopting a foreign/hard currency or monetary standard is a last resort to curb hyperinflation,” Angel commented. “But even weak governments like to have the power of the printing press, as it provides a fiscal mechanism to pay the troops.”

The Central African Republic made crypto legal tender in April 2022 – the second country to do so, after El Salvador. Some CAR representatives said crypto would help reduce fees for financial transactions in and out of the country. Perhaps there is also a valid reason to elevate crypto to official currency.

Rahman acknowledged that “there are benefits such as seeing a reduction in transaction fees for financial transactions. If there is a weak traditional banking system or a lack of trust, cryptocurrency can undoubtedly provide an alternative means of payment.”

“Remittance is a good use case for Bitcoin,” Youssef said. “Money transfer companies charge high fees and it can take days for the money to arrive.” Bitcoin cuts down on fees and transactions can take minutes. People who may not have a bank account can also benefit from money transfers. “This is a big deal when you look at the amount that remittances bring into certain countries. In El Salvador, remittances make up over a quarter of the country’s GDP.”

Others, however, were dismissive. “I think legal tender status in this context is probably a gimmick. I’m not sure how I can be more motivated to send BTC to someone living in CAR just because BTC is now seen as legal tender in that jurisdiction, David Andolfatto, head of the economics department and professor at the Miami Herbert Business School at the University of Miami, told Cointelegraph.

Moreover, the act of giving a “foreign” currency legal tender status “seems to me to be an admission that a country’s institutions cannot be trusted to govern society effectively,” added Andolfatto, a former senior vice president at the Federal Reserve Bank of St. .Louis where he became one of the world’s first central bankers to give a public speech about Bitcoin in 2014.

Bitcoin remains questionable as legal tender because it does little to curb the so-called “flight-to-safety” phenomenon, where the demand for money shifts wildly with sudden changes in consumer or business sentiment, Andolfatto explained.

– These violent fluctuations in the price level are unnecessary […] What is needed is a monetary policy that expands the supply of money to meet 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.”

“Transaction fees are a drag on global economic activity,” Brown noted, and developing countries often bear the brunt of these inefficiencies. Still, “In my view, 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 since they didn’t have their own currency to begin with.”

More maturity

Bitcoin is still relatively young and volatile. But with wider adoption, including institutional investors, couldn’t it become a stable asset, more like gold? “There is some merit to this argument,” says Andolfatto. “I think BTC price volatility will decrease as the product matures.” But even if BTC remains stable for long periods, “it will always be subject to ‘flight-to-safety’ phenomena that will generate sudden large deflations – or inflations if people dump BTC,” he added. “BTC will seem stable, but it will remain fragile.”

Youseff, like some others, suspects that the IMF has an ulterior motive in all this. The fund is interested in self-perpetuation, he suggested, adding:

“Bitcoin has been shown 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 reduce a country’s dependence on international centralized power – such as the IMF. It is not hard to connect the dots as to why the IMF does not accept Bitcoin.”

“Crypto-assets like Bitcoin are still young in terms of currency,” Brown noted, but their inherent weaknesses such as price volatility and pseudo-anonymity can present “insurmountable challenges from the perspective of nation-states. Nevertheless, Bitcoin has become a backstop option when fiat currencies fail through macroeconomic events such as hyperinflation and controls around capital flight.”

If not the main role, still a supporting role?

For argument’s sake, 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. Does that still rule out BTC and other cryptocurrencies playing a useful social or economic role globally?

“I see a very useful role for crypto-technology, which is why I have been a vocal advocate for CBDCs [central bank digital currencies] since 2014,” Angel replied. “There are very good reasons why over 100 central banks work with these.”

But he is skeptical of Bitcoin because “governments have a long history of pushing private money aside. I’m surprised it’s taken as long as it has for governments to react and try to push Bitcoin aside to get all the seigniorage revenue for themselves.”

Overall, cryptoassets like Bitcoin may continue to be “kept in limbo by many nation-states and regulators,” Brown argued, given that they are inherently anti-establishment but also “almost impossible” to ban in free societies.

Bitcoin and other digital assets can still serve a positive role as “the trigger that forces the monopoly, which is central banks,” to rethink their monetary policy “and to innovate in response,” Brown said.