With a proposal by Lord Fusitu’a to make Bitcoin legal tender in Tonga due to go to Parliament in March, the problems facing a tiny Central American country may act as a warning.
So may the wave of drug and human trafficking related-crime that uses Bitcoin to launder its proceeds – a wave that already threatens the Pacific.
Lord Fusitu’a told the Financial Review last year his Bitcoin bill would make it easier for Tongans working overseas to send money home.
However, the tiny Central American republic of El Salvador, which became the first country in the world to make Bitcoin legal on September 7 last year, has already found its decision has been costly.
Bitcoin is defined as “a digital currency which operates free of any central control or the oversight of banks or governments. Instead it relies on peer-to-peer software and cryptography.”
International financial bodies warned El Salvador not to make Bitcoin legal, but President Nayib Bukele pushed through legislation making the cryptocurrency legal just three days after announcing the decision at a conference.
Now the International Monetary Fund has urged El Salvador to strip Bitcoin of its status as legal currency due to its large risks, highlighting a major obstacle for the nation’s efforts to get a loan from the institution.
According to Al Jazeera, last year El Salvador sought a $1.3 billion IMF loan, but talks have been stalled by the lender’s Bitcoin concerns. Any programme would need to be approved by the board.
IMF executive directors, who represent the fund’s 190 member nations, said Bitcoin posed risks to “financial stability, financial integrity, and consumer protection” and fiscal liabilities. They urged Salvadorean authorities strip Bitcoin of its legal tender status.
Some IMF directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds. The comments came in the board’s discussion of the IMF’s annual review of El Salvador’s economic and financial developments.
According to a report by Bloomberg News, El Salvador began buying Bitcoin last year when it was trading around US$50,000 and has bought at least 1801 coins. The cryptocurrency has fallen 45% from its peak of almost US$68,000 in early November, meaning the Central American nation may have lost as much as US$20 million.
There have been numerous reports of different kinds of cryptocurrency schemes collapsing, despite lavish promises made by their promoters, including recent cases in the UK.
There have also been major arrests in the US over Bitcoin laundering and theft charges involving billions of dollars.
International law enforcement agencies have also identified cryptocurrencies at the centre of global money laundering operations by drug and human trafficking cartels, whose links stretch from Central and South Americas to China and beyond.
Three years ago the United Nations Office on Drugs and Crime warned that cryptocurrencies like Bitcoin were being used to launder criminal proceeds and began training law enforcement officials across the Pacific.
Senior judges, prosecutors and police across the Pacific were briefed on the heightening threat of online fraud and extortion through the use of untraceable and unregulated digital currencies.
Authorities in the Pacific told the ABC’s Pacific Beat they were unprepared to deal with crypto currency-related crime.
According to New Zealand’s Financial Markets Authority cryptocurrency service providers face a high risk of being targeted by money launderers and terrorism financiers.
