El Salvador welcomes the Bitcoin as the official national currency. The International Monetary Fund has doubts about this project in a general blog post.
The President of El Salvador Nayib Bukele is not just making friends with his plan to introduce Bitcoin as the official national currency. The skepticism among his compatriots is high, but this is more due to ignorance about the crypto currency and its connections. The International Monetary Fund is also not impressed by the plans to make a cryptocurrency a state’s official means of payment.
A Blog post from Tuesday of this week such an undertaking is viewed critically, even if the plans from El Salvador are explicitly not mentioned there. If a crypto-asset were to be granted legal tender status, it must be accepted by every creditor for payment of liabilities. Tax money is one of them. The crypto currency would then in fact have the same status as the banknotes and coins (currency) issued by the central bank. Theoretically, a law would also be possible, according to which the crypto currency becomes the obligatory means of payment for everyday purchases. However, the authors see the danger here that domestic prices could become very unstable. Even if all prices were quoted in Bitcoin, the prices of imported goods and services would still fluctuate massively, following the whims of valuations of the crypto market.
Exchange rate risk too high for El Salvador?
It is also clear to the authors of the IMF contribution that countries with a stable national currency and with little inflation are not very interested in it anyway. But what about in the economically unstable El Salvador, where the US dollar has taken over the function of the national currency in the past few decades? Here the authors argue that the introduction of Bitcoin as an official means of payment would definitely promote financial inclusion. But still there would be a constant exchange rate risk for the population. With every purchase you would have to ask yourself which means of payment would be more suitable, in the case of El Salvador, Bitcoin or US dollars.
Government revenues would also be exposed to the same exchange rate risk. If taxes were quoted in advance in a crypto-asset while spending remained largely in the local currency, the only way tax revenue could fall would be unfavorable exchange rates. Conversely, according to the IMF, you would have the same problem. The authors of the IMF blog come to the following quintessence, which is rather gloomy for the conditions of El Salvador:
As a national currency, cryptocurrencies – including Bitcoin – carry significant risks to macro-financial stability, financial integrity, consumer protection, and the environment. Trying to make crypto assets a national currency is an inadvisable shortcut.
An advantageous alternative, which is not mentioned in the IMF article, would be the introduction of DeFi and stablecoins in El Salvador.