Last month, El Salvador became the first country in the world to begin accepting Bitcoin as legal tender. The move was seen by Bitcoin bulls as a huge indication of what cryptocurrency could mean for the future of money. Detractors argued that Nayib Bukele, El Salvador’s president, was opening the door for corruption by accepting the standard as national currency.
The International Monetary Fund falls into the former camp, recently warning against other countries taking steps to introduce bitcoin as their own legal tender. In a blog post published Monday, the IMF contends, “As national currency, cryptoassets — including bitcoin — come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment.”
What’s Wrong With Crypto?
The IMF laid out its reasoning for why crypto likely won’t take off as a form of legal tender in most countries. The main concern they cited was stability. Since crypto is generated by a technological process that isn’t overseen by any central authority, there’s no one keeping tabs on how the assets are doing. As such, when Bitcoin takes a nosedive in value, there’s no central bank that can swoop in and change Bitcoin policies to help keep the value from collapsing.
Likewise, deflationary pressures with Bitcoin would be a serious risk if the coin suddenly jumps in value. Merchants would need to update their prices daily to reflect the ever-shifting value of the coin, making even basic commerce a pain in the neck. Speaking to this wild value fluctuation, WWF International president Pavan Sukhdev told Yahoo Finance that, in his opinion, Bitcoin is not a currency, it’s an asset.
This view is shared by the IMF, which routinely refers to coins like Bitcoin and Ether as “cryptoassets” instead of cryptocurrency.
As for consumer protection, the IMF’s warning primarily concerned the anonymous nature of crypto. Since you store your crypto in digital wallets that can be linked to the internet, it’s possible for hackers to make off with your assets and leave you with nothing. Skilled hackers would leave no trace of their presence, making this kind of theft completely impossible to reverse.
The Environmental Concerns
Another concern that has plagued Bitcoin in every arena is its environmental impact. Few technological advances in the past decade have been so heavily scrutinized for their impact on global emissions as cryptocurrency. The reasoning for this is sound: having a computer mine for crypto is extremely power-intensive and presents a major draw on the power grid of countries around the world.
That power, by and large, is generated by fossil fuels like coal. As such, cryptoassets consume significant energy in exchange for digital coins. To some critics, this is tantamount to turning on a machine that pollutes for no other reason than to burn energy. This “proof of work” model is critical to Bitcoin’s value, thus making Bitcoin and other cryptoassets intrinsically bad for the environment.
Not All Bad News
The IMF conceded that there are some upsides to cryptoassets in some countries. “Then again, real currency may not always be readily available, nor easily transferable. Moreover, in some countries, laws forbid or restrict payments in other forms of money. These could tip the balance towards widespread use of cryptoassets.”
This was tempered, however, by a warning. The IMF contended that, while people in countries with Bitcoin as legal tender might use it for transactions, they would likely not use it to store value. People would be expected to convert crypto into other currencies as soon as they got it.
Another major focus of campaigns against crypto is that digital currencies are the primary driver in underground transactions. The IMF argues “cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.”
This is especially troubling for the international community due to the economic realities of countries that have considered making Bitcoin legal tender. For instance, El Salvador’s President Bukele has been accused of turning a blind eye to corruption. Some have even accused the president himself of being compromised by criminal elements within the country.
An Asset, Not a Currency
Numerous other issues, including exposing banks and investors to wild fluctuations in value, unequal access to the internet to utilize the coins, and the huge electricity requirements of crypto all stand in the way of making it a recognized currency in most of the world.
While some countries may favor Bitcoin over the Euro or the dollar, the IMF argues that they do so at their own peril. Cryptoassets are doing well right now, but, if history is any indication, the next major dip is always just around the corner. Most people would probably be pretty unhappy if the money in their wallet was suddenly worth half what it was yesterday.