IMF issues veiled warning over El Salvador’s Bitcoin bill

The International Monetary Fund (IMF) has warned that some of the consequences of a country adopting Bitcoin as a national currency “could be extremely dire.”

According to Tobias Adrian, financial counselor and head of the IMF's markets department, and Rhoda Weeks-Brown, general counsel and director of the legal department, cryptocurrencies such as Bitcoin could become popular in countries with inflation and unstable exchange rates, providing a means of payment for the unbanked. However, the costs to an economy could be huge.

The two IMF officials said that countries that adopt cryptocurrencies as national currencies or "grant legal tender status to crypto assets" face the risk of domestic prices becoming very volatile and the use of assets violating anti-money laundering and countering terrorist financing measures, in addition to issues surrounding macroeconomic stability and the environment.

“If goods and services are priced in both real money and crypto assets, households and firms will spend a lot of time and resources choosing which currency to hold, rather than engaging in productive activities,” Adrian and Weeks-Brown said. “Government revenues will be exposed to exchange rate risk if taxes are quoted in advance in crypto assets while expenditures remain primarily denominated in local currency, and vice versa.”

They also claim that monetary policy in general "will lose influence" and suggest that widespread cryptocurrency adoption would undermine the credibility of any country that adopts assets such as Bitcoin or other tokens, and they also point out that "cryptocurrency prices are too volatile." This year, the price of Bitcoin has fluctuated between about $65,000 and $30,000, reaching more than $40,000 today before falling to around $37,000.

Although the IMF blog did not explicitly mention El Salvador, which will accept Bitcoin as legal tender from September, Adrian and Weeks-Brown said that adopting any cryptocurrency as a national currency would be an "undesirable shortcut" to more inclusive financial services. Although El Salvador's President Nayib Bukele has said he plans to use the country's abundant geothermal energy to produce Bitcoin blocks, Adrian and Weeks-Brown said cryptocurrency mining carries environmental risks.

It is nothing new for the IMF to express seemingly negative views on countries that adopt cryptocurrencies. A spokesperson has previously stated that the recognition of digital currencies as legal tender by smaller countries such as the Marshall Islands "poses risks to macroeconomic and financial stability, as well as financial integrity." In this case, the island's local economy is strained by the economic impact of the pandemic and may not be resolved by the introduction of a digital currency, the IMF said.