El Salvador’s crypto dream falters under IMF pressure
El Salvador’s crypto dream falters under IMF pressure . The Central American country is in negotiations for a $1.3 billion loan, with the financial organization conditioning the aid on changes to the Bitcoin Law, according to the ‘Financial Times’
EL PAÍS América
El Salvador, a country of just over six million people, has been the site of several bold monetary experiments. In 2001, the U.S. dollar became the country’s sole official currency. Twenty years later, on September 7, 2021, it made history by becoming the first nation to grant bitcoin legal tender status through the Bitcoin Law. This regulation allows both citizens and businesses to use the cryptocurrency for payments and tax purposes, mandating its acceptance nationwide. The country also began accumulating bitcoin in its state reserves. It was a revolutionary move, occurring at a time when bitcoin was recovering from the collapse of the TerraLuna cryptocurrency and nearing new highs of $69,000 in early November. However, three years later, this revolution is faltering, and the ambitious crypto vision of the country’s president, Nayib Bukele, could soon be reversed.

According to the Financial Times, El Salvador is negotiating with the International Monetary Fund (IMF) to obtain a $1.3 billion loan, with the condition that changes be made to the Bitcoin Law. Specifically, the IMF is urging the government to remove the legal mandate that forces businesses to accept bitcoin as a form of payment. Instead, its use would become voluntary, effectively diminishing its role as legal tender in the country.

The British newspaper reports that the ongoing negotiations could unlock additional loans — $1 billion from the World Bank and another $1 billion from the Inter-American Development Bank, in the coming years. These loans are aimed at reducing El Salvador’s public debt, bolstering its banking reserves, and improving its growth outlook. The government has also pledged to reduce the budget deficit by 3.5 percentage points of GDP over three years, through spending cuts and tax hikes. Additionally, it plans to increase reserves from $11 billion to $15 billion.

The IMF has repeatedly criticized El Salvador’s monetary policy. In 2022, the institution warned about the significant risks of using bitcoin as legal tender, advising against its adoption. “In the short-term, the costs and risks largely outweigh the benefits,” the IMF stated. The risks identified included threats to financial stability, as banks and other institutions could be exposed to bitcoin’s price volatility; risks to financial integrity, as cryptoassets might facilitate terrorism financing, tax evasion, and money laundering; and risks from theft and cyberattacks.

At the time, the situation appeared dire, and the IMF had reason for concern. When the war in Ukraine triggered a global market downturn, bitcoin’s price plummeted by more than 50% from its all-time highs. This, in turn, caused El Salvador’s government bonds to tumble, raising doubts about the country’s ability to meet its next debt payment. Even then, the IMF, which could have supported El Salvador with back-up financing to help it meet its obligations, urged the government to remove bitcoin as legal tender, as its volatility jeopardized public finances. Bukele’s refusal, however, complicated negotiations.

That critical moment seems like a distant memory for El Salvador’s authorities. Just last week, when bitcoin reached $100,000 for the first time in its history, Salvadoran sovereign bonds saw a rally. Debt maturing in 2041 rose 1.2 cents, reaching a price of 93.1 cents on the dollar, the highest since June 2021. Meanwhile, bonds maturing in 2035 rose 1.3 cents, reaching 97.6 cents per dollar, their highest value in more than three years. “This is the first time in history that Bitcoin has driven sovereign bonds up in traditional markets,” Bukele celebrated on X (formerly Twitter).

Judith Arnal, senior researcher at the Elcano Royal Institute and the Center for European Policy Studies (CEPS), explains that the IMF’s cautious stance towards bitcoin is understandable, given that the cryptocurrency was designed as a challenge to the traditional financial system, of which the IMF is a central player. However, she finds it surprising that the IMF only insists on eliminating bitcoin as legal tender and does not address the impact on El Salvador’s state coffers.

“That’s an investment with taxpayer money, and it ties El Salvador’s fiscal future to the performance of bitcoin. That, frankly, is very dangerous,” she argues. According to the country’s Bitcoin Office, El Salvador has so far acquired 5,961.77 bitcoins, valued at more than $598 million at current market prices.

While El Salvador is seen as a haven for the digital asset community, analysts argue that reversing its crypto-state project would have little impact on bitcoin or the broader market. David Tercero-Lucas, professor of economics at the Universidad Pontificia de Comillas-ICADE, notes that the use of bitcoin as a payment method has been minimal even within El Salvador. “This change could limit bitcoin adoption among the population and discourage its use in commerce, but such adoption is already practically nonexistent,” he says.

In reality, the bitcoinization of the country remains a distant dream. When the Bitcoin Law was passed to encourage the use of the cryptocurrency for everyday transactions, the government introduced incentives for the population to use Chivo, a digital wallet that allows users to trade both bitcoin and dollars. Citizens who downloaded the app received $30 in bitcoin — equivalent to 3.75 times the country’s daily minimum wage, according to a 2022 paper from the National Bureau of Economic Research (NBER).

The same organization conducted a nationwide survey of 1,800 households to assess the success of El Salvador’s crypto-policy. The results showed that most Chivo Wallet downloads occurred at launch: “40% took place in September 2021, and practically no downloads were recorded in 2022,” the document notes. The primary motivator for downloading the app was the $30 bonus promised by the government. After spending the bonus, only 20% of respondents continued using the wallet, and mainly for dollar transactions. Less than 10% continued using it for bitcoin transactions.

On the business side, only 20% of companies accept bitcoin as a form of payment, according to the study, and those that do are mostly large enterprises. Most of these businesses immediately convert bitcoin revenue into dollars. The asset’s volatility, coupled with privacy concerns, has deterred wider adoption of the platform and limited its economic impact.

As a result, experts agree that while the potential agreement with the IMF would be negative for bitcoin, its effect on the crypto markets would be limited. Bitcoin is largely viewed as a store of value rather than a medium of exchange. Santiago Carbó, professor of economics at the University of Valencia in Spain, believes this development could set a precedent, leading other countries that had been encouraged by bitcoin’s rise to reconsider their plans to adopt the cryptocurrency — particularly if they need to turn to institutions like the IMF for financial assistance. In this regard, the expert is firm: “El Salvador will probably cease to be a bitcoin icon.”

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2024-12-13
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The Central American country is in negotiations for a $1.3 billion loan, with the financial organization conditioning the aid on changes to the Bitcoin Law, according to the ‘Financial Times’
El Salvador’s crypto dream falters under IMF pressure