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Does the IMF have a hidden script for El Salvador’s Bitcoin play?

On January 25, a board member of the International Monetary Fund (IMF) told El Salvador thatNarrow the range“By removing the status of Bitcoin fiat currency, Bitcoin Law”.Adopting cryptocurrencies, as the countries of Central America did, “has great risks to financial and market integrity, financial stability and consumer protection,” the fund. I have written..

Why did the IMF ask El Salvador to effectively pull the plug for its cryptocurrency experiment? Indeed, this small country ranks 104th in the world in terms of gross domestic product (GDP), but it does not threaten the balance sheet of international banks. In addition, 70% of El Salvador’s population does not have a bank account, and one-fifth of GDP comes from US remittances. Undoubtedly, it can profit from Bitcoin (BTC) use.

Again, it’s only half a year since El Salvador declared the fiat currency of Bitcoin. This is the world’s first fiat currency. Is it enough time to draw really useful conclusions?

One of the purposes of the IMF is to “ensure replacement. [rate] Gavin Brown, an associate professor of financial technology at the University of Liverpool, told Cointelegraph. Bitcoin and cryptocurrencies generally show extreme volatility, as evidenced by the recent 50% drawdown from record market prices in November. “This clearly requires the IMF to pay attention to volatile monetary alternatives such as Bitcoin at best.”

Other motives

But that may not be the only thing. “The significant impact of such a country pivoting towards Bitcoin as they did is not a big deal in itself,” Brown continued. “But what matters is the signal this sends to other countries. [El Salvador] Make it successful. “

After all, more than 65 countries now have their currencies fixed at the US dollar, Brown said. “This has secured the dollar’s dominance, along with the dollarization of oil and the power of the US economy.” Bitcoin, and thus El Salvador, is not yet a direct threat to this. “But the keyword there is” still “. As a result, other countries may turn their heads to Bitcoin and El Salvador. “

Others were not surprised that the IMF was asking the country to abolish fiat testing. “It doesn’t surprise me that the IMF is making this request to El Salvador for multiple reasons,” ProChain Capital president and co-founder David Tawil told Cointelegraph.

Tawil said the IMF wants fewer borrowers because it relies on sovereign states as the lender of last resort in the world. Also, El Salvador does not have a particularly good record in the IMF or capital markets in general. But he suggested that there might be more self-serving behind it, adding:

“As Bitcoin becomes a powerful reserve currency worldwide, the effectiveness and need of the IMF can be significantly reduced.”

In addition, the risks stated in the fund’s January 25 statement, including financial stability, are “given that there is little evidence that Bitcoin is widely used in everyday transactions in El Salvador. It doesn’t seem to be a compelling and sufficient reason, “Syed Rahman, a partner at law firm Rahman Ravelli, told Cointelegraph.

What drove the fund into action at that time? “The IMF is clearly reacting to recent volatility in the market,” Rahman said. Given the price cuts and the apparent decline in investor demand for BTC, the IMF’s view is “it is not clear whether the current structure is attracting a recurring source of liquidity.”

Pioneer or rebel

But maybe the IMF knows where it’s talking. What if President Nayib Bukele of El Salvador stumbled more than a seer and his country’s epic experiments were just a huge bunch?

“The El Salvador experiment hasn’t worked very well,” Tawil admitted. Due to technical problems, the recent decline in Bitcoin’s market price has helped. “El Salvador is not a pioneer in a powerful and prosperous economy, so it was unlikely that there would be a long line behind El Salvador.”

“There is no evidence of successful adoption of Bitcoin,” John Hawkins, a senior lecturer at the Faculty of Political Economy and Sociology at the University of Canberra, told Cointelegraph. In any case, the country will continue. ”

One possible exception could be a country where hyperinflation has led to a loss of confidence in its currency, such as Venezuela.

Hawkins continued that foreign investment in El Salvador has not surged since September, when BTC became fiat currency. “President Bukele has promised to add 25% to El Salvador’s GDP.” That is not happening.

84% adoption rate?

Meanwhile, Ark Investment Management Report The one issued in late January states that the adoption of cryptocurrencies has surged in the country. “It suggests that an estimated 3.8 million people are using Chivo, El Salvador’s Bitcoin wallet, and 84% are employed by eligible citizens.” According to the report, traditional banks are now. More people than accounts (1.9 million) have Bitcoin wallets.

Hawkins wasn’t impressed. El Salvadorans who followed President Bukele’s advice on holding Bitcoin instead of dollars would have lost a significant proportion of their savings, he told Cointelegraph:

“It’s not surprising that many wanted a Chivo wallet, as it came with $ 30 for free. According to a news article, many have just withdrawn $ 30 and have been pursuing a wallet ever since. I’m not using it. ”

Ark Investment also said that Chivo settled $ 2 million in daily remittances as of October 2021, “accounting for about 12% of El Salvador’s annual remittance of $ 6 billion and more than 2% of GDP.” It states. The country’s Bitcoin play has given citizens an unprecedented financial opportunity, Said Ark CEO Cathie Wood.

“El Salvador will hopefully continue the experiment,” Tawill told Cointelegraph, predicting that “it will be a slow but significant success.” And the price of Bitcoin will rise again. Indeed, in the long run:

“El Salvador may be the most important pioneer in this sector.”

Still, if El Salvador continues to ignore the IMF Directive, is there any price to pay? “What the IMF says is important,” Hawkins said. “Even without respecting their expertise, El Salvador is looking for a loan from them.” Disposing of the fund and taking action that multilateral banks consider to be at risk means that El Salvador will get the loan. It just makes it difficult to do.

Hidden proceedings?

What about this notion of being simply hostile to cryptocurrencies, as the IMF has a back motive and threatens the US dollar and the current global banking system?

“I absolutely agree,” Tawil said. “I think the IMF is a self-serving body and is likely to be as corrupt as any other global governing body, such as the International Olympic Committee.”

Hawkins was different. “I don’t think the IMF is motivated by protecting banks. They are concerned about the welfare of the people of El Salvador and also want El Salvador to be able to repay loans from the IMF.”

Rahman commented that the IMF is taking a “quite aggressive approach” to crypto-related products, but current volatility is affecting all markets, not just crypto. “It’s also worth noting that the relationship between El Salvador and the United States is deteriorating. We can speculate that this is one factor.”

What is the timing of the IMF message and why is it now? The fund was critical of El Salvador’s BTC experiment from the beginning, but “with the current cut in Bitcoin prices, the IMF shouted,’I told you,’ and has additional power behind that opinion. I am. ”

Bukele bought a particularly large number of BTCs during the recent crypto drawdown. “Most people come in when the price goes up,” he says. Tweet January 24, “But the safest and most profitable moment to buy is when prices go down. It’s not rocket science.”

Read the future

The IMF’s request to El Salvador for Bitcoin “shows that the institution is behind the scenes,” deVere CEO Nigel Green declared in an email press release. “IMF [is] Calls on pioneering sovereign states to stop future-oriented monetary policy that seeks to break away from financial instability and reliance on other countries’ currencies. “

It should also be remembered that the IMF is headquartered in Washington, DC, the United States is a founding member, and the United States is also the largest contributor to international organizations with 190 member states. “Therefore, the fate and interests of the IMF and the United States are arguably inextricably linked,” Brown told Cointelegraph.