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This article was published on January 26, 2022

A brief history of El Salvador’s crypto feud with the IMF

The bitcoin beef is heating up


A brief history of El Salvador’s crypto feud with the IMF

Investing in crypto is a risky business — particularly when you’re betting with a country’s future. It’s nonetheless a gamble that El Salvador’s president has been eager to make.

Nayib Bukele’s splurging on bitcoin has been lauded by crypto advocates, but criticized in the traditional financial world.

The IMF has been among his most vociferous detractors. The International Monetary Fund has repeatedly urged El Salvador to ditch Bitcoin’s legal sentence — much to Bukele’s chagrin.

Here’s a brief history of the dispute between the lender and the Central American nation.

March 2021: El Salvador pursues IMF funding

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Days after Bukele’s ruling party won a landslide election victory, a government official tells Reuters that El Salvador is seeking $1.3 billion in funding from the IMF.

Finance Minister Alejandro Zelaya says the deal would help leverage budgetary gaps and lower costs associated with the country’s debt.

The IMF had made a previous emergency loan to El Salvador to help with the pandemic in 2020, which it also did for numerous other countries.

June 2021: Analysts warn that bitcoin will complicate IMF deal

Bukele plans to make bitcoin legal tender in El Salvador.

Proponents say the move could help Salvadorians without bank accounts, make it more efficient to send remittances, boost economic development, and end the reliance on global financial institutions.

However, the proposal sparks concerns about the IMF deal.

Siobhan Morden, an analyst who heads Latin America fixed-income strategy at Amherst Pierpoint Securities, says Bukele’s tweets about bitcoin could disrupt the negotiations:

This may just reflect a long-term initiative or maybe even just a flashy PR tactic; however it shows lack of coordination with impulsive announcements that contradict a cohesive economic plan.

June 2021: Congress approves bitcoin law gets congressional approval

Congress approves Bukele’s proposal to adopt bitcoin across El Salvador.

The digital asset is set to join the US dollar as legal tender in 90 days. The bitcoin/dollar exchange rate will be set by the market.

July 2021: IMF warns against using crypto as legal tender

As El Salvador prepares to adopt bitcoin nationwide, the IMF cautions countries against usingcryptocurrencies as legal tender. The lender says the move could financial stability and integrity.

Ricardo Castaneda, senior economist and coordinator for El Salvador at the Icefi think-tank, tells the FT that Bukelele’s plans could complicate relations with the IMF:

I don’t think they thought through all the implications. It’s an experiment. It will be interesting to see if it works or not, but the implications, if it doesn’t, are very serious.

September 2021: Bitcoin is adopted

El Salvador becomes the first country in the world to adopt bitcoin as legal tender.

The move means citizens can use the cryptocurrency to make purchases, pay taxes, and send remittances. A new digital means of payment — the Chivo e-wallet — is also introduced. Citizens who download the app are promised a $30 reward.

The initial rollout is marred by technical issues, protests, and slow adoption. Critics fear the move will plunge the country into further debt.

A day before the law comes into effect, Bukele snaps up more bitcoin after a price dip that he credits to the IMF.

However, not all of his attempts to buy the dip are perfectly timed.

October 2021: Bitcoin pitched as beneficial to IMF deal

The president of El Salvador’s central bank argues that adopting bitcoin won’t create an obstacle to negotiations with the IMF.

Instead, he says the project’s benefits will be a focus of the talks.

We don’t see any risks. Perhaps, upside risks. [Bitcoin will] become a payment system, a system for financial inclusion.

November 2021: Bukele plans ‘Bitcoin City’ and ‘Bitcoin Bond;’ the IMF issues another warning

At an event in the beach resort of Mizata, Bukele unveils plans to build the world’s first “Bitcoin City.”

Donning his trademark backward baseball cap, the 40-year-old tells the crowd that the city will be built near Venezuela’s Conchagua volcano.

The volcano would provide geothermal power for both the city and Bitcoin mining. Bukele says funding will come from a sales tax and an issue of $1bn in sovereign bonds backed by Bitcoin.

Half of the $1 billion in bonds will go towards building energy and mining infrastructure. The other half will be invested in bitcoin. 

 

The announcement comes on the same day that the IMF reveals its early findings from a visit to El Salvador.

The statement advises the country to be cautious with bitcoin:

Recently announced plans to use the proceeds of new sovereign bond issuances to invest in bitcoin, and the implications of trading more broadly in bitcoin, will require a very careful analysis of implications for, and potential risks to, financial stability.

Bukele points to the positives. He notes that the IMF’s evaluation includes considerable praise of his government.

January 2022: IMF urges El Salvador to remove bitcoin as legal tender

The IMF concludes a consultation with El Salvador by urging the country to “remove Bitcoin’s legal tender status.

In a statement, the fund’s directors stress the “large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection.” They also express concerns over the risks associated with issuing bitcoin-backed bonds.

In keeping with his image as an edgelord, Bukele responds with a meme.

The president is not alone in mocking the IMF. Critics argue that the fund’s actions are driven by a desire to protect currencies, debts, and monetary policies that it can control.

Others, however, argued that the IMF legitimately believes that the project will be disastrous for El Salvador’s economy.

The IMF seems unlikely to provide financing until changes are made, but Buekele shows no signs of backing down. Their impasse may continue until bitcoin reaches a momentous tipping point.

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