On Jan. 25, the International Monetary Fund’s (IMF) directors asked El Salvador to “narrow the scope” of its Bitcoin Law by “removing Bitcoin’s legal tender status.” Adopting a cryptocurrency as the Central American country has done “entails large risks for financial and market integrity, financial stability and consumer protection,” the fund wrote.
Why did the IMF ask El Salvador to effectively pull the plug on its cryptocurrency experiment? Surely this small country — ranked 104th globally in gross domestic product (GDP) — is no threat to the international bank’s balance sheet. Moreover, 70% of El Salvador’s populace is unbanked, and one-fifth of its GDP is from United States remittances. Arguably, it could profit from Bitcoin’s (BTC) use.
Then again, it’s only been half a year since El Salvador declared Bitcoin legal tender — the world’s first nation to do so. Is that really enough time to draw any useful conclusions?
One objective of the IMF is “to ensure exchange [rate] stability,” Gavin Brown, associate professor in financial technology at the University of Liverpool, told Cointelegraph. Bitcoin and cryptocurrencies generally have exhibited extreme volatility, evident in the recent 50% drawdown from November’s record market prices. “This clearly gives a mandate for the IMF to be at best cautious of volatile monetary alternatives such as Bitcoin.”
But that may not be the whole story. “The material impact of such a nation pivoting toward Bitcoin as they have done is in itself not a big deal,” Brown continued. “However, what is important is the signal that this sends to other nations should they [El Salvador] make a success of it.”
After all, more than 65 countries presently peg their currencies to the U.S. dollar, Brown noted. “This, along with the dollarization of oil and the strength of the U.S. economy, has ensured the primacy of the dollar.” Bitcoin and, by extension, El Salvador are not yet a direct threat to this. “But the keyword there is ‘yet.’ Other nations may have their heads turned by Bitcoin and El Salvador as a…