In what can only be read as a veiled message to El Salvador and any country looking to follow in its footsteps, the International Monetary Fund (IMF) on Monday published a blog post advising against adopting Bitcoin as legal tender.
Authored by Tobias Adrian, Director of the IMF’s Monetary and Capital Markets Department, and Rhoda Weeks-Brown, Director of the IMF’s Legal Department, the blog post dives into the topic of adopting crypto assets as national currencies, or rather into why the IMF representatives believe that to be a bad idea.
"Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting cryptoassets legal tender status, and even making these a second (or potentially only) national currency," Adrian and Weeks-Brown write. While they do not mention countries by name, El Salvador is currently the only country that has declared Bitcoin legal tender, making it the likely subject of the blog post. Notably, Bitcoin is not El Salvador's only legal tender; it still uses the U.S. dollar as its national currency, with president Nayib Bukele having stated that he currently has no plans to step away from the dollar as legal tender.
The concept of Bitcoin as legal tender is "unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions," the IMF blog post continues, claiming that Bitcoin's volatility makes it unattractive to citizens of such countries. Instead, a "globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a cryptoasset."
Assets like Bitcoin may be used by the unbanked for transactions, but not as a store of value, the authors write. Where they see an advantage for crypto assets are countries that restrict the use of other forms of payment than the local currency.
In using Bitcoin as legal tender, "monetary policy would lose bite," Weeks-Brown and Adrian continue, citing macroeconomic risk should Bitcoin be made not only a national currency, but also a unit of account in which products are priced — which is not the case in El Salvador. The authors also fear that anti-money laundering recommendations issued by the Financial Action Task Force (FATF) can't be effectively implemented at this point, which they say results in increased risk for illegal activities through Bitcoin.
Further, the blog post speaks of the large amounts of energy required to mine bitcoin and other proof-of-work assets, stating that "the ecological implications of adopting these cryptoassets as a national currency could be dire." The energy-based argument against Bitcoin has enjoyed increased popularity among critics in recent months, yet no clear data is available on Bitcoin's actual carbon footprint; meanwhile, Bitcoin's energy consumption is negligible on the global scale of energy use.
El Salvador is further working on establishing bitcoin mining operations using geothermal energy from at least one of the country's 11 volcanos — should the country go through with its plans, volcano-powered bitcoin mining would in fact be an environmentally friendly way to consume energy that would otherwise be unused.
Yet Bitcoin itself bears too many risks to "macro-financial stability, financial integrity, consumer protection, and the environment" to warrant its benefits of inclusive and cheap financial services, the authors conclude. Instead, they suggest, governments should "step up to provide these services."
Of course, it goes without saying that no government can provide decentralized and immutable transactions.
The IMF, whose stated mission is to provide financial stability and reduce poverty, has previously stated that it found El Salvador's Bitcoin law to raise economic and legal issues.