Bitcoin in El Salvador creates problems with IMF since last year – Finance – Tecnoblog

El Salvador and its cool president, Nayib B Watch, took the whole world by surprise last year when the country became the first to make bitcoin (BTC) a official currency, as well as the US dollar. The news was celebrated by cryptocurrency supporters, but raised concern from international bodies and many friction with the IMF.

Nayib Bukele, President of El Salvador, implements bitcoin as official currency (Image: Reproduction/Presidencia El Salvador)

The International Monetary Fund repeatedly asked El Salvador to reconsider the legal adoption of bitcoin. Still in March 2021, the Central American country sought IMF funding. As determined by Reuters, Salvadoran government officials requested $1.3 billion days after Bukele won the elections.

At the time, the agreement was to help the country fill out the multiple budget gaps and reduce the costs associated with Divided from El Salvador. However, the IMF had already made an emergency loan to the nation during the height of the Covid-19 pandemic in 2020.

Then came the wild plans, considered daring and somewhat surreal, involving bitcoin. In June of last year, several analysts warned about the risks that cryptocurrency could bring for El Salvador’s already fragile economy. But the key point of this concern was what the approval of this policy could mean for the Salvadoran government’s relationship with the IMF.

Bitcoin would certainly negatively affect ongoing negotiations with the International Monetary Fund. However, Bukele insisted the move could help Salvadorans unbanked, make it more efficient to send international remittances into the country, boost economic development and end dependence on global financial institutions.

In an interview with Reuters, Siobhan Morden, analyst who leads Latin America fixed income strategy at Amherst Pierpoint Securities, said Bukele’s tweets about bitcoin are expected to disrupt trades:

“This may just reflect a long-term initiative or maybe just a flashy PR tactic; however, it shows a lack of coordination with impulsive announcements that run counter to a cohesive economic plan.”

In June, the Salvadoran Congress handily passed the so-called “Bitcoin Law” proposed by Bukele. After the specified period of 90 days, the cryptocurrency has become a legal tender in the country, together with the US dollar. However, the exchange rates between the two currencies continued to be defined by the market.

International Monetary Fund (IMF) (Image: International Monetary Fund/Flickr)
International Monetary Fund (IMF) (Image: International Monetary Fund/Flickr)

The following month, the IMF again warned El Salvador against using bitcoin, arguing that the insertion of the digital asset, volatile as it is, could worsen the already unstable Salvadoran economy and compromise financial integrity from the country.

However, Bukele is determined in his experiment at thel national. But if it goes wrong, the consequences must be severe., both economically and politically. Not only will he bury his political career, he will leave a negative mark on El Salvador for years in the eyes of major international bodies.

Bitcoin was finally put into circulation in the Salvadoran economy in September 2021, making the country the first in the world to do so. In practice, citizens can use cryptocurrency for everything from everyday purchases to paying taxes, all through an app and the state-owned Chivo digital wallet. The debut of the asset was marked by technical problems, protests by the population and the adoption was much slower than expected.

Even though, Bukele continued to buy bitcoins during low cryptocurrency periods. In October, the “young” president, who at age 40 wears a backwards cap as a trademark, argued that the digital currency was proving beneficial to El Salvador and denied that the move would have affected its ongoing agreement with the IMF. In reality, he suggested that the highlighted positive aspects of the Bitcoin Act would be the key point of negotiations with the International Monetary Fund.

“Bitcoin City” and sovereign bonds were the last straw

Preparation of the bitcoin mining center in El Salvador (Image: Reproduction/Twitter)
Preparation of the bitcoin mining center in El Salvador (Image: Reproduction/Twitter)

A situation became more tense in November, when Bukele announced the so-called “Bitcoin City”, an entire city based on a gigantic cryptocurrency mining facility and powered by a geothermal plant, with a volcano as the energy source. The president also stated that funding will come from a sales tax and the issuance of $1 billion in bitcoin-backed sovereign bonds.

Bukele even made a Show to advertise your bitcoin city:

Half of the revenue generated would go towards funding this mega-project and the other half would go towards buying more bitcoins. On the same day as the announcement, the IMF revealed its first analysis after representatives visited El Salvador.

In a statement, the agency again advised the country to be cautious com bitcoin:

“Recently announced plans to use proceeds from new sovereign bond issues to invest in bitcoin, and the implications of trading more widely in bitcoin, will require very careful consideration of the implications and potential risks to financial stability.”

Bukele’s response appeared to play down the report’s negatives and inflate some of the praise the IMF’s assessment gave his government. Now, in January 2022, the IMF appears to have exhausted its warnings (and patience).

IMF Gives Ultimatum: Repeal Bitcoin Law

The International Monetary Fund formally asked for El Salvador to reverse the Bitcoin Act and to abandon its use as legal tender in the country. In a statement, the fund’s directors emphasized the “major risks associated with using bitcoin for financial stability, financial integrity and consumer protection.” They also expressed concerns about the risks associated with issuing bitcoin-backed securities.

Bukele, cool as he is, replied with a meme:

After that, I doubt the Salvadoran president will ever say that his relationship with the IMF is good. Now, more than ever, the negotiations with El Salvador seem to result in a obvious refusal for billionaire funding, at least as long as the Bitcoin Law remains in force. However, neither Bukele nor the fund showed any intention of giving in.

With information: The Next Web

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