Casey Wagner

<div id="highlights-block_62a3a31b85428" class="highlights">
 <ul>
 <li>IMF report suggests countries, crypto infrastructure providers move away from proof-of-work-based CBDCs</li>
 <li>CBDCs should be better for the environment than existing systems, analysts said</li>
 </ul>
 
</div>



A new study from the International Monetary Fund urges countries looking to develop CBDCs to consider energy consumption when making their design choices.



Central banks should “design CBDCs [central bank digital currencies] with the explicit goal to be environmentally friendly,” the IMF said in the <a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2022/06/07/Digital-Currencies-and-Energy-Consumption-517866" target="_blank" rel="noreferrer noopener">report</a>. The payments system broadly, including central banks’ legacy systems, uses a large amount of energy, and moving toward renewables across the entire financial sector should be the goal, IMF analysts added.&nbsp;



“What we are seeing now is a broader realization that if CBDC is going to be an infrastructure, it has to be better than the one we have,” Carmelle Cadet, CEO of CBDC infrastructure provider EMTECH, said. “In addition to processing payments faster, with easier traceability and trust, CBDC has to be energy efficient.”&nbsp;



“Major cloud service providers are shifting toward renewable sources of energy such as geothermal and hydropower, as well as toward locations with colder climates, to reduce the carbon footprint in generating power,” the report read. “Adding the environmental footprint as a selection criterion of a cloud partner can benefit not only the CBDC project, but also any future digitization project of a central bank.”&nbsp;



The IMF also recommends that countries and crypto companies move away from energy-intensive proof-of-work protocols, a suggestion some say could impact user experience.&nbsp;



“Different protocols focus on various priorities…you have trade-offs that might not align to energy efficiency,” Cadet said.



The report comes as more nations, particularly developing countries, make strides toward launching their own CBDCs, which advocates say can drastically improve the lives of those living in predominantly cash-driven societies.&nbsp;



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration [for developing a CBDC],” a recent report from the <a href="https://www.bis.org/publ/bppdf/bispap123.htm" target="_blank" rel="noreferrer noopener">Bank for International Settlements</a> said. “Other significant considerations include strengthening competition among payment service providers (PSPs), increasing efficiency and reducing the costs of financial services.”&nbsp;



Jamaica <a href="https://cms.blockworks.co/in-historic-move-jamaica-makes-cbdc-akin-to-cash/" target="_blank" rel="noreferrer noopener">has already approved</a> its upcoming CBDC as legal tender in the nation. Brazil, Nigeria and Haiti are among the jurisdictions exploring the establishment or expansion of CBDCs. The Central Bank of the Bahamas’ Sand Dollar became the world’s first CBDC in 2020.



With environmental, social and governance-focused investing and climate change at the front of many minds, it is not a surprise that the IMF is choosing to focus on how digital assets impact the environment, according to another CBDC expert.&nbsp;



“Central banks are thinking about energy, and they should be thinking about energy,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs. “Energy efficiency is not just about how to do this with digital currency, it is also about the lack of energy efficiency and moving physical currency, which is also an issue.”



Correction: An earlier version of this story featured an image of Christine Lagarde, who was the Managing Director of the IMF until 2019 when she became the President of the European Central Bank.



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Consider the Environment When Designing CBDCs, IMF Urges

<div id="highlights-block_62713125a2ba4" class="highlights">
 <ul>
 <li>Banco Galicia’s move targets young clients and highlights a global trend in crypto adoption by traditional banks</li>
 <li>Argentines are increasingly using cryptocurrency to protect their savings against rampant inflation</li>
 </ul>
 
</div>



Banco Galicia, Argentina’s biggest private bank by market cap, has added crypto trading to its investment platform, the bank confirmed Monday. Argentines rank among the world’s top adopters of digital assets in part due to inflation in the South American country.



The move targets young clients, who survey data shows want streamlined access to crypto via traditional banking avenues, the bank’s senior product manager Nicolas de Giovanni told <a href="https://www.bloomberg.com/news/articles/2022-05-02/two-argentine-banks-allow-customers-to-buy-cryptocurrencies" target="_blank" rel="noreferrer noopener">Bloomberg</a>.&nbsp;



Clients can buy digital assets on the same platform they use to buy stocks or bonds through the bank’s partnership with crypto wallet <a href="https://www.lirium.com/" target="_blank" rel="noreferrer noopener">Lirium</a>. Unlike with other exchanges, however, users can’t withdraw or send their cryptocurrency.



The bank confirmed it was launching crypto trading in the home banking app after Argentines spotted the new function on Monday. The feature will initially only be available to clients who receive their income via direct deposit.



Banco Galicia, which is listed on the Nasdaq and the Buenos Aires stock exchange, is the first major bank in the country to provide such services.



But it won’t be the only one: Digital bank Brubank SAU will also offer crypto trading services, including bitcoin, ether and USDC, starting this week as well.&nbsp;



Until now, Argentines had to use centralized exchanges through wallets or trade directly through over-the-counter exchanges.



Argentina has been grappling with high inflation and the devaluation of its currency, the peso, for years now. In 2017 it received a $44 billion bailout from the International Monetary Fund, the institution’s largest-ever relief package. Locals in turn have started investing in crypto to protect their savings from shrinking purchasing power.



Banco Galicia joins a growing number of traditional banks worldwide moving into digital assets. Last month, Commerzbank, Germany’s fourth-largest bank, confirmed it <a href="https://cms.blockworks.co/german-banking-giants-move-into-crypto-highlights-growing-trend-in-europe/" target="_blank" rel="noreferrer noopener">wants to offer digital assets</a> custody and exchange services to clients, focusing initially on institutional customers.



In Argentina, as well as other Latin American countries such as El Salvador, crypto adoption is becoming mainstream. Recently, Argentine <a href="https://cms.blockworks.co/argentina-moves-to-incubate-crypto-startups-under-regulatory-eye/" target="_blank" rel="noreferrer noopener">authorities announced an innovation hub</a> to boost fintech and crypto startups in a regulated environment. Employers can also pay up to 20% of an employee’s salary in cryptocurrencies.



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Argentina’s Biggest Private Bank Adds Crypto Trading

Macauley Peterson

<div id="highlights-block_62548c57b453e" class="highlights">
 <ul>
 <li>The study considered seven variables to account for a prevalence for crypto adoption in 53 countries to determine which were most significant</li>
 <li>The IMF also highlighted the role cryptoassets can play in providing transparency for procurement or other payments related to government projects</li>
 </ul>
 
</div>



Cryptoassets have “unleashed a plethora of financial innovation that will likely revolutionize the form of money and the ways it is used,” a recently published International Monetary Fund report said, but the multilateral lender cautioned that, without regulation, cryptoassets may also facilitate illicit capital flows.



In an alliteratively titled <a href="https://www.imf.org/en/Publications/WP/Issues/2022/03/25/Crypto-Corruption-and-Capital-Controls-Cross-Country-Correlations-515676" target="_blank" rel="noreferrer noopener">working paper</a> — Crypto, Corruption, and Capital Controls: Cross-Country Correlations — IMF researchers concluded that, based on crypto usage data drawn from Statista’s <a href="https://www.statista.com/global-consumer-survey" target="_blank" rel="noreferrer noopener">Global Consumer Survey</a>, “cryptoasset usage is significantly and positively associated with corruption and capital controls.”



But the paper goes beyond identifying correlation to say that “that cryptoassets may be used to transfer corruption proceeds or circumvent capital controls” and calls on regulators to “bring empirical evidence to bear on the question of whether cryptoassets facilitate corruption.”



The researchers noted that cryptocurrencies are hardly unique in that respect, though, pointing out that the anonymity of cash, especially large denomination notes, is exploited for crime and tax evasion. 



<h3>Interpretation is key</h3>



The authors evaluated crypto adoption depending on seven variables, including inflation rates, remittances and GDP per capita, but determined that control of corruption and capital controls are clearly the most significant factors.



The question for regulators is, what accounts for the correlation?



&#8220;While there are certainly examples of bad actors using cryptoassets to circumvent oversight, these individuals are not the driving factor for the higher rates of crypto adoption we’re seeing in countries with prevalent corruption,” said Budd White, chief product officer and co-founder at Tacen, a Wyoming crypto compliance firm.



<blockquote class="wp-block-quote">“Cryptocurrencies inherently operate outside the systems that facilitate corrupt government officials, and thus offer individuals a secure means of protecting their own assets,” White told Blockworks.</blockquote>



The IMF report’s authors found both factors were practically indistinguishable in terms of their significance within the survey data. But the practical implementation of capital controls is itself a highly nuanced affair, according to Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association. Just because capital controls exist doesn’t mean they are functioning well, she told Blockworks.



<blockquote class="wp-block-quote">“Consumers understand the degree of corruption inherent in their financial sector and economy and seek a financially inclusive, transparent and independent form of exchange through crypto,” Kusz said.</blockquote>



Transparency is commonly considered an antidote to corruption, and the paper notes that “these technologies could also be used to improve transparency and record-keeping for procurement or other payments related to government projects, thereby increasing accountability, and reducing the scope for corruption.”



That puts the IMF framing squarely in the <a href="https://www.forbes.com/sites/forbesfinancecouncil/2019/10/03/if-you-believe-in-the-promise-of-blockchain-you-believe-in-cryptocurrency" target="_blank" rel="noreferrer noopener">“blockchain not crypto”</a> school of thought. The authors specifically mention the potential of central bank digital currencies (CBDC) to “offer additional resilience, safety and availability with lower costs,” concluding that “work should continue in using the technologies underlying crypto assets to realize the potential benefits to financial inclusion and the efficiency of governments.”



The authors analyzed data from surveys of 2,000 to 12,000 people in 53 countries. They highlight a need for better data on adoption trends, citing limitations of earlier studies and a lack of sufficient high-quality data.



Yet, regulators should not wait for “conclusive evidence,” the authors contend, but should consider “the urgency of acting before it’s too late.”



However, the efficiency benefits of a CBDC are only useful in the absence of corruption. For a citizen fleeing a corrupt regime, attempting to preserve the value of their savings, the censorship resistance inherent to crypto is paramount.



So, the question becomes, “too late for whom?”



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Is Crypto Fueling Corruption or Helping Citizens Flee It?

<div id="highlights-block_623b30beda87c" class="highlights">
 <ul>
 <li>El Salvador is changing its approach to the bond issuance, delaying and modifying the previously announced plan</li>
 <li>The successful roll out of bitcoin mining is seen as key for President Nayib Bukele’s government as prospects for International Monetary Fund funding are slim</li>
 </ul>
 
</div>



El Salvador has postponed the issue of its highly anticipated volcano bonds, which were originally slated to be issued by March 20, according to Finance Minister Alejandro Zelaya.&nbsp;



Nayib Bukele, El Salvador’s president, introduced the bitcoin-backed bonds in November 2021. They are supposed to raise $1 billion for the Central American nation’s “bitcoin city,” a community at the foot of the <a href="https://en.wikipedia.org/wiki/Conchagua_(volcano)" target="_blank" rel="noreferrer noopener">Conchagua volcano</a>, complete with mining operations and low taxes, Bukele promised.



Zelaya told bondholders earlier this month that the bitcoin bonds will now be backed by La Geo, a state-owned thermal company, according to Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial.



Zelaya had previously stated that the war in Ukraine might impact timing of the bond issuance, with market appetite for risky assets dwindling.



The bonds will be issued on the Liquid Network, a Bitcoin layer-2 established by <a href="https://cms.blockworks.co/?s=blockstream" target="_blank" rel="noreferrer noopener">Blockstream</a>. While Blockstream is providing the technology, it is not working directly with the El Salvador government on the bonds, a spokesperson from the company said.



Launching the bond is still essential for combating El Salvador’s slim loan prospects and mounting debt, Marshik said. The International Monetary Fund has <a href="https://cms.blockworks.co/el-salvadors-volcano-bond-could-launch-this-week/" target="_blank" rel="noreferrer noopener">made clear its disdain</a> for the adoption of bitcoin as legal tender.



The postponement comes as speculation around other Latin American countries leaning into digital assets swells. <a href="https://digitnews.in/the-president-of-honduras-may-announce-the-legalization-of-bitcoin-in-the-country-tomorrow/" target="_blank" rel="noreferrer noopener">Honduras</a> or Malaysia may become the second nation after El Salvador to adopt bitcoin as legal tender, <a href="https://www.thestreet.com/investing/cryptocurrency/malaysia-may-be-the-next-country-to-make-bitcoin-legal-tender" target="_blank" rel="noreferrer noopener">according to news reports</a>.



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El Salvador Delays Volcano Bond Issue, Unveils State-owned Company Backing

<div id="highlights-block_622f9bc254635" class="highlights">
 <ul>
 <li>The so-called &#8220;volcano bonds&#8221; would be the first bitcoin-backed bonds issued by a country</li>
 <li>The International Monetary Fund has urged El Salvador to remove bitcoin as legal tender, citing volatility and additional risk for the country’s citizens</li>
 </ul>
 
</div>



As El Salvador dives deeper into bitcoin, the country’s closely watched and controversial &#8220;volcano bonds&#8221; could launch as soon as Tuesday.



Finance Minister Alejandro Zelaya told a local TV channel that “between March 15 and 20 is the right timing,” adding that the country has “the tools almost finished.”&nbsp;



“But the international context will tell us&#8230;I didn&#8217;t expect the war in Ukraine,&#8221; Zelaya <a href="https://www.reuters.com/technology/el-salvador-says-could-launch-bitcoin-sovereign-bond-between-march-15-20-2022-03-11/" target="_blank" rel="noreferrer noopener">reportedly said</a>.



Launching the bitcoin bond — dubbed the “<a href="https://cms.blockworks.co/el-salvador-plans-bitcoin-city-funded-by-bitcoin-bonds-and-powered-by-a-volcano/" target="_blank" rel="noreferrer noopener">volcano bond</a>” after the mining operation’s power source, the Conchagua volcano — has become increasingly important due to the country’s slim loan prospects and mounting debt, Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial, said.



No details, regulatory framework or prospectus has been issued regarding the bonds, Marshik pointed out, making it difficult to predict demand for the offering.



<blockquote class="wp-block-quote">“These bonds started as a sovereign bond,” Marshik said. “Now, it is a securitized corporate bond, which [raises] the question of success.”</blockquote>



A loan from the International Monetary Fund (IMF), which has urged El Salvador to remove bitcoin’s status as legal tender, is unlikely, according to Marshik.



“Odds of an IMF loan are nil,” she said. “[El Salvador officials] are going around saying they have a pension reform pending, and they will get a $590 million bond from the pension system.”



Bitcoin poses significant risks to financial stability and consumer protection, IMF executive directors said in January in a <a href="https://www.imf.org/en/News/Articles/2022/01/25/pr2213-el-salvador-imf-executive-board-concludes-2021-article-iv-consultation" target="_blank" rel="noreferrer noopener">statement</a> about El Salvador’s financial health.



“[Directors] stressed that there are large risks associated with the use of bitcoin,” the statement said. “They urged the authorities to narrow the scope of the bitcoin law by removing bitcoin’s legal tender status.”



The IMF expects El Salvador’s fiscal deficit to reach 5.75% of gross domestic product (GDP) in 2021 and about 5% of GDP in 2022. Public debt is also anticipated to rise to about 96% of GDP in 2026. Given the circumstances, the IMF estimates El Salvador is on an “unsustainable path.”



<blockquote class="wp-block-quote">“The IMF forecasts a primary balance for 2022, yet says the debt is unsustainable under current policies,” Marshik said. “El Salvador needs a 3% of GDP adjustment to get the debt to a sustainable level.”</blockquote>



Persistent fiscal deficits and high debt service are leading to large and increasing financing needs, the IMF report noted.&nbsp;



El Salvador has an $800 million bond maturing in January 2023. In July 2021, ratings agency Moody’s downgraded the country’s debt rating to CAA1 — putting it at risk of default.



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