El Salvador angrily rejects IMF call to drop bitcoin use

The government of El Salvador on Monday rejected a recommendation by the International Monetary Fund, IMF, to drop bitcoin as legal tender in the Central American country.

Treasury Minister Alejandro Zelaya angrily said that “no international organisation is going to make us do anything, anything at all”.

Zelaya told a local television station that bitcoin is an issue of “sovereignty”.

“Countries are sovereign nations and they take sovereign decisions about public policy,” he said.

The IMF recommended last week that El Salvador dissolve the US$150-million trust fund it created when it made the cryptocurrency legal tender, and return any of those unused funds to its treasury.

“The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection,” the IMF said in a statement last week.

The agency cited concerns about the volatility of bitcoin prices, and the possibility of criminals using the cryptocurrency. After nearly doubling in value late last year, bitcoin has plunged in value.

Zelaya said El Salvador has complied with all financial transaction and money-laundering rules.

The trust fund was intended to allow the automatic conversion of bitcoin to US dollars – El Salvador’s other currency – to encourage people wary of adopting the highly volatile digital currency.

DIGITAL WALLET

The IMF also recommended eliminating the offer of US$30 as an incentive for people to start using the digital wallet called ‘Chivo’ and increasing regulation of the digital wallet to protect consumers. It suggested there could be benefits to the use of Chivo, but only using dollars, not bitcoin.

“In the near term, the actual costs of implementing Chivo and operationalising the bitcoin law exceed potential benefits,” the report said.

Salvadoran President Nayib Bukele had been dismissive of the IMF’s recommendation’s concerning bitcoin, having promoted the adoption of the cryptocurrency as a way for thousands of Salvadorans to avoid money-transfer fees when relatives living outside the country sent home remittances.

Government officials told the IMF that the launch of Chivo had significantly increased financial inclusion, drawing millions of people who previously lacked bank accounts into the financial system. They also spoke of the parallel tourism promotion targeting bitcoin enthusiasts.

The government did not see a need to scale back the scope of its bitcoin law, but agreed regulation could be strengthened, according to a report.

El Salvador’s law called for all businesses – with the technological ability – to accept bitcoin as payment. The roll-out was glitchy, but seems to have smoothed out.

Bukele became a darling of the cryptocurrency’s promoters and has since spoken of building a bitcoin city and issuing bitcoin-backed bonds, something else some IMF directors expressed concern over.

Bukele led the push to adopt bitcoin as legal tender alongside the US dollar. El Salvador’s Legislative Assembly made the country the first to do so in June, and the bitcoin law went into effect in September.

El Salvador and the IMF have been negotiating a US$1.3-billion lending programme for months.

In its statement, the IMF did commend Bukele’s government on its management of the COVID-19 pandemic. The country is currently experiencing a surge in infections, but it was aggressive in vaccinating the population and kept a relatively low death toll.

The agency also noted that the economy was projected to grow 10 per cent in 2021 after contracting 7.9 per cent the year before, but warned of potential problems if the government doesn’t tighten up its spending.

“Persistent fiscal deficits and high debt service are leading to large and increasing financing needs,” the IMF statement said. “Under current policies, public debt is expected to rise to about 96 per cent of GDP in 2026, on an unsustainable path.”

AP