Threatened by Bitcoin, the IMF is now fighting back

Bitcoin could be the first global currency. But its rules are enforced by code and physics rather than bureaucracy and politics. The IMF fears being replaced and is fighting back in remarkable ways.

“He who is unfit to serve his fellow citizens wants to rule them.”

Ludwig von Mises

Benjamin Franklin said that “in this world nothing can be said to be certain, except death and taxes”. I think we can safely add bureaucracy to that list. International bureaucracy, enshrined in complex agreements between nations, is especially sticky.

Just ask the Bank of International Settlements why it still exists. After all, the Germans are done with repaying their gold debts from World War 1, are they not?

Or the International Monetary Fund. The IMF. Founded in 1944 to protect a monetary arrangement that is long gone.

Well, at least the IMF still somewhat adheres to its first and only mission: Making sure the Dollar stays top dog.

You see, the IMF isn’t very “international”. It is dominated by Washington for the sake of Washington and most people in Washington think that the ability to print the worlds reserve currency is a good thing to have and want to keep it that way.

Time and again the US has resisted any attempts to reform the IMF into a truly international organization. When Asia was given more power in 2015 - after stiff resistance from the US for years - it was taken from the Europeans. At least they get to nominate the talking head at the top of the organisation. But that’s all they do really.

Until today the US has de facto veto power within the IMF. So when you see IMF, think Washington.

The big dream: The IMF as the worlds central bank?

If a true reform ever comes to pass, the IMF could - in theory - become the worlds central bank. John Maynard Keynes envisioned this in 1944, but was shut down by Harry Dexter White and the Americans. Keynes understood that using a national currency as an international money was a bad idea.

As did the economist Robert Triffin who warned about it in 1959. After he formulated his “Triffin Dilemma”, the IMF came up with the brilliantly named “Special Drawing Rights” - a sort of supranational currency-basket. Like the ECU (European Currency Unit) was the precursor to the Euro, the SDR could be the precursor to the first truly global currency. “The Economist” called it the “Phoenix” in 1988 and predicted its rise for 2018.

The phoenix zone would impose tight constraints on national governments. There would be no such thing, for instance, as a national monetary policy. The world phoenix supply would be fixed by a new central bank, descended perhaps from the IMF. The world inflation rate – and hence, within narrow margins, each national inflation rate- would be in its charge. Each country could use taxes and public spending to offset temporary falls in demand, but it would have to borrow rather than print money to finance its budget deficit. With no recourse to the inflation tax, governments and their creditors would be forced to judge their borrowing and lending plans more carefully than they do today. This means a big loss of economic sovereignty, but the trends that make the phoenix so appealing are taking that sovereignty away in any case. - The Economist (source)

So now we have two contenders for the world reserve currency: the Dollar and the SDR. Both are connected to the IMF. So far, the Dollar stays firmly in charge.

The last IMF chief who tried to push the SDR was Dominique Strauss Kahn. In May of 2011 he called for a “new world currency” based on the SDR. A few months later he was arrested in New York and had to step down. After a couple of months the charges where dropped.

The Chinese also support the idea of a global money based on the SDR. Their central bank chief called for it in 2009.

The world economic crisis shows the "inherent vulnerabilities and systemic risks in the existing international monetary system," Gov. Zhou Xiaochuan said in an essay released Monday by the bank. He recommended creating a currency made up of a basket of global currencies and controlled by the International Monetary Fund and said it would help "to achieve the objective of safeguarding global economic and financial stability." (ABC News)

Decades before it was the Europeans who long supported the idea of moving away from the Dollar and onto a system based on the SDR. But like the Chinese after them, they were frustrated. Instead they built their own version of a supranational currency called the Euro. Its strict rules and the theory behind the Eurozone sound remarkably similar to what the Economist discribed in 1985.

But how the Euro was put into practice afterwards shows the weaknesses of a politics-based monetary system. When the first crisis hit, all rules were thrown over board and the money printer was started. Not a good look.

Bitcoin obsoletes the IMF, the IMF fights back

Enter Bitcoin. Nobody can bend the rules. Noone can influence the central bank because there is no central bank. Bitcoin obsoletes the IMF forever.

So the bureacrats are fighting back.

The IMF has repeatedly warned El Salvador and even called on the tiny country to take back its law that makes Bitcoin a legal tender. (BBC)

Hilariously the IMF does not forget to underline the potential of Dollars running on the Bitcoin-Network even while blasting Bitcoin itself.

Digital means of payment such as Chivo (government e-wallet) have an important role to play in promoting financial inclusion, especially if used in US dollars. But as noted by our Executive Board, there are large risks associated with using Bitcoin as legal tender, especially given the high volatility of its price. (IMF)

For Argentina, they already adapted their tactic.

The large country is a much bigger deal than El Salvador. I’ve lived there for almost a year. Argentina is the posterboy for inflation. Bitcoin would be perfect for Argentina and its people. And in August of last year Argentinan president Alberto Fernandez stated that he was open to introduce Bitcoin in a television interview. The central bank was quick to dismiss the idea. (Bitcoin Magazine)

Now, it’s possible that this was just a way to get some leverage in talks with the IMF.

Anyway, in March 2022 the IMF made Argentina sign a letter of intent stating that they will stay away from “cryptocurrency” - using the usual reasons.

The clause was included in a letter of intent signed by Economy Minister Martín Guzmán and central bank president Miguel Pesce on March 3. It detailed Argentina’s efforts “to discourage the use of cryptocurrencies with a view to preventing money laundering, informality, and disintermediation” in order to “to further safeguard financial stability.” (Fortune)

Now this is truly fascinating. The IMF has started binding the delivery of its loans (that are only designed to stabilize the Dollar system in the first place, not to really help anyone) to nation states promising not to look too closely at Bitcoin. With an ageing Dollar-system and the SDR nowhere near ready to take over, the bureacrats feel the pressure of Bitcoin. They fear it.

Enter India. There, the government is in active exchange with the IMF over “cryptocurrencies” (read: Bitcoin).

The International Monetary Fund (IMF) has flagged significant financial risks over allowing the use of cryptocurrencies, as India deliberates with multilateral agencies and domestic institutions about a planned regulatory framework, said government officials aware of the discussions.

While the IMF did not comment on the specific discussions with India, its mission chief for India Nada Choueiri told Mint that crypto assets posed significant risks, including to financial stability. “Crypto-assets can also be misused for money laundering, terrorist financing, and other illegal activities. Unless effective regulatory measures are implemented, the crypto-assets ecosystem could face serious consumer protection challenges such as fraud and cyberattacks," said Choueiri.

She added that the IMF was deliberating with other countries too on the issue as a multilateral understanding or cooperation was required for effective policy. (Mint)

Did you catch that?

El Salvador, Argentina, India and “other countries”.

I suspect we will see more “letters of intent” and “exchanges of ideas” like that in the future. And a lot of other stuff.

This fight has only begun.