The IMF warned against countries using cryptocurrencies as legal tender, just over a month before El Salvador became the first country in the world to allow bitcoin to pay for everything from haircuts to taxes.
The Washington-based lender said in a blog post in late July that widespread use of cryptocurrencies would threaten “macroeconomic stability” and could also damage financial integrity, due to crypto’s links to illicit activity .
The IMF did not refer directly to El Salvador. But while he is in talks with the Latin American country over a $ 1 billion loan, his warning suggests that the plans of President Nayib Bukele, 40, could complicate relations.
“I don’t think they’ve thought through all of the implications,” said Ricardo Castaneda, senior economist and coordinator for El Salvador at Icefi, a think tank. ” It’s an experience. It will be interesting to see if this works or not, but the implications, if not, are very serious.
Bukele makes bitcoin legal tender from September 7. He says this will unlock prosperity and offer “a great leap forward for humanity.”
His plan is based on a pilot project at “Bitcoin Beach,” a surf station where residents are paid in bitcoin and use it for daily transactions. It was launched in 2019 with the support of an anonymous US bitcoin donor.
Nayib Bukele, President of El Salvador, says turning bitcoin into legal tender offers “a great leap forward for humanity” © Camilo Freedman / Bloomberg
The president says nationwide adoption of cryptocurrency will help the 70% of the population without access to traditional financial services in a country that adopted the dollar two decades ago. He did not rule out placing some central bank reserves in crypto.
He wants to use geothermal energy from volcanoes to mine bitcoin in the country, though details are still unclear. It is also launching an electronic wallet dubbed Chivo – Salvadoran slang for “cool” – which will offer people $ 30 in bitcoin to encourage its use. Bitcoin ATM operator Athena is said to be installing 13 machines in shopping malls.
But the World Bank has refused to help deploy bitcoin in El Salvador and the IMF has previously warned of “macroeconomic, financial and legal issues that require very careful analysis.”
The plans have left many in the financial world bewildered and Salvadorans bewildered.
Bond prices fell in response. Meanwhile, the country faces a “critical” fiscal situation, with debt at 89% of GDP, a budget deficit of 10.1% of GDP in 2020 and $ 2 billion in debt repayments due this year, added Castaneda at Icefi.
In a survey by the El Salvador Chamber of Commerce and Industry, more than 90% of respondents did not want to be forced to accept bitcoin as a form of payment and three quarters promised to continue using dollars . A survey by Universidad Francisco Gavidia found that 44% expected this to make the economy worse.
“I assume that adoption will be limited,” said Risa Grais-Targow, director for Latin America at consultancy firm Eurasia Group. “There are still a lot of questions as to whether this can really take off. “
But cryptocurrency proponents argue that Latin America’s history of financial collapse and hyperinflation makes the entire region an ideal crypto melting pot as ordinary people search for ways to protect themselves from the events. erratic economics.
Argentina grapples with unsustainable debt and the regular threat of default, while the Venezuelan economy has contracted by 75% since 2013. The official exchange rate is 3.3 million bolivars per dollar (the black market rate is in the billions) and annual inflation is over 2,600 percent.
“With bitcoin, for the first time in a very long time, people in Latin America saw an asset appreciate in dollar terms,” said Mauricio Di Bartolomeo, chief executive of Ledn, a digital asset based company. in Toronto.
“The people of Latin America have had their farms confiscated and have seen banks collapse overnight, so in a way bitcoin is more secure than other assets.”
Bitcoin supporters point to banks such as Citi, which is considering launching crypto services, as a sign that it is becoming mainstream.
“Bitcoin is a messiah,” Cristian Cabrera, a 37-year-old self-proclaimed Argentinian cryptocurrency adviser, said as he lunched at Bitcoin Embassy, Mexico City’s premier crypto cafe. “It represents equality for all.”
“We are building the infrastructure for the economy of the future,” said Emiliano Grodzki, managing director of Bitfarms, a bitcoin mining company he co-founded in Toronto after suffering inflation and devaluations in his native Argentina.
“In this new ecosystem, we are replacing central banks. . . it’s a whole new paradigm, ”he told FT after his company was listed on the Nasdaq in June.
A man in El Salvador displays a phone app that displays the price of bitcoin © SOPA Images / LightRocket via Getty
In Mexico, Ricardo Salinas, the third richest man in the country, said he held 10% of his liquid wallet in bitcoin. He expressed his support for the currency on Twitter in June and said he was working to make his Banco Azteca the first bank in the country to accept it.
In one day, however, the central bank, the finance ministry and the banking regulator fought back, claiming Mexican banks are not allowed to offer bitcoin operations and warning of the risks.
In Paraguay, Congressman Carlos Rejala, presented a bill to regulate bitcoin and bitcoin mining. A university even allows tuition fees to pay in crypto.
Despite skepticism, advocates remain determined. Lorena Ortiz, owner of Bitcoin Embassy, a bar in Mexico City, has customers aged 78 and as young as 16. “Crypto isn’t just a fad,” she said. “It’s here to stay.”
Additional reporting by Gideon Long in Bogotá
