The battle between the International Monetary Fund (IMF) and El Salvador continues, particularly over the adoption of Bitcoin as legal tender.
The persistence of the International Monetary Fund
The IMF has long been helping El Salvador with favourable loans, as the country is still developing and has had financial problems in the past. Probably the fact that, in theory, El Salvador may have found an alternative does not please these “lenders of last resort” at all.
Moreover, the IMF has long expressed views against the adoption of Bitcoin in general, while back in June it expressed concerns about El Salvador’s decision.
These concerns have so far proved irrelevant, but Bitcoin has only been legal tender in the country for two and a half months.
In June, the IMF had not only raised concerns, but its Director of Communications, Gerry Rice, pointing out that the Fund had granted an emergency loan to the country last year to help it deal with the health emergency, actually questioned whether a new loan would be granted.
The tax-free Bitcoin city
What’s more, a few days ago the President of El Salvador even announced the idea of creating a new city with virtually no taxes, except VAT, thanks to Bitcoin, and this must have increased the IMF’s concerns.
Indeed, the following day it published a statement reiterating its concerns about Bitcoin becoming legal tender.
IMF’s concerns over El Salvador’s choice of Bitcoin
In the document, the IMF writes that medium-term uncertainty regarding the issuance of sovereign bonds to buy Bitcoin and finance infrastructure investments is very high, and in this respect it is very likely right, considering not only that the value of Bitcoin is volatile but also that there is no certainty that it will grow.
It also raises a question regarding supervision, namely whether the country is able to comply with anti-money laundering regulations.
While admitting that digital payment systems such as Chivo (the government’s Bitcoin wallet based on the Lightning Network) have the potential to make payments more efficient, improve financial inclusion and support growth, the IMF points to risks to consumer protection, financial integrity and financial stability due to the high volatility of Bitcoin’s real value.
The IMF also claims that its use gives rise to contingent tax liabilities, which is why they argue that Bitcoin should not be used as legal tender at all.
Indeed, they are explicitly asking El Salvador to change its laws and the functioning of the Chivo wallet.
The power of the International Monetary Fund
This request has a strong anti-democratic aftertaste, and seems to indicate that the Fund presumes to have power over the laws of sovereign countries. However, there is no evidence that, at least in theory, the IMF has such powers. One might even go so far as to assume that it is trying to acquire them, in a way that is totally alien to common democratic practices.
In the light of all this, it is very difficult to imagine that the real aim of the IMF is to help the Salvadorans, while it would seem more likely that it is trying to use its power to influence even the politics of a state which, in theory, should be free in this respect.
Moreover, the IMF is not a democratic body, and nobody has explicitly authorized it to impose changes to its own laws, or to the laws of other countries. Despite being formally controlled by the governments of 190 states, in reality its policies are often strongly influenced by those few states with strong political and financial power, so much so that it has never had a director who was not European.
To all intents and purposes, this seems to be a kind of war fought without physical weapons, but with money, between an extremely powerful global financial system and a small sovereign Central American country that has decided to try to take other paths. However risky, if not reckless, these paths may be, the country should be free to pursue them, even at the cost of losing out.
In other words, the IMF should not have the power to block the democratic policies of a free country, although in the case of El Salvador doubts have been raised about the actual democratic nature of its system of government, so much so that its Democratic Index is not that of a real democracy, but only of a so-called “hybrid regime”.