The IMF has warned against countries using cryptocurrencies as legal tender, just over a month before El Salvador is set to become the first nation in the world to allow bitcoin to pay for everything from haircuts to taxes.
The Washington-based lender said in a late July blog post that widespread use of cryptocurrencies would threaten “macroeconomic stability”, and potentially also harm financial integrity, through crypto’s links with illicit activity.
The IMF did not refer to El Salvador directly. But as it is in talks with the Latin American country over a $1bn loan, its warning suggests 40-year-old president Nayib Bukele’s plans could complicate relations.
“I don’t think they thought through all the implications,” said Ricardo Castaneda, senior economist and co-ordinator for El Salvador at Icefi, a think-tank. “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.”
Bukele is making bitcoin legal tender from September 7. He claims this will unlock prosperity and offer “a great leap forward for humanity”.
His plan builds on a pilot scheme in “Bitcoin Beach”, a surf resort where locals are paid in bitcoin and use it for everyday transactions. It was launched in 2019 with backing from an anonymous US bitcoin donor.
The president claims adopting the cryptocurrency nationwide will help the 70 per cent of the population without access to traditional financial services in a country that adopted the dollar two decades ago. He has not ruled out placing some central bank reserves in crypto.
He wants to use geothermal power from volcanoes to mine bitcoin in the country, although the details are still vague. He is also launching an e-wallet dubbed Chivo — Salvadoran slang for “cool” — that will offer people $30 in bitcoin to incentivise its use. Bitcoin ATM operator Athena is reportedly setting up 13 machines in shopping centres.
But the World Bank has refused to help with El Salvador’s bitcoin rollout 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 baffled and Salvadorans nonplussed.
Bond prices fell in response. Meanwhile the country faces a “critical” fiscal situation, with debt at 89 per cent of GDP, a 2020 fiscal deficit of 10.1 per cent of GDP and $2bn 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 per cent of respondents did not want to be obliged to accept bitcoin as payment and three-quarters vowed to continue using dollars. A poll by the Universidad Francisco Gavidia found 44 per cent expected it to make the economy worse.
“I assume the uptake will be limited,” said Risa Grais-Targow, director for Latin America at consultancy Eurasia Group. “There are still a lot of questions around whether this can really take off.”
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But cryptocurrency proponents argue that Latin America’s history of financial meltdowns and hyperinflation makes the whole region an ideal crypto crucible as ordinary people look for ways to shield themselves from erratic economic events.
Argentina is battling an unsustainable debt load and the regular threat of default, while Venezuela’s economy has shrunk by 75 per cent since 2013. The official exchange rate is 3.3m bolívares per dollar (the black market rate is in the billions) and annual inflation is more than 2,600 per cent.
“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 Toronto-based digital asset company.
“People in Latin America have had their farms taken away and seen banks crumble overnight, so in a way bitcoin is more secure than other assets.”
Bitcoin believers point to banks such as Citi, which is weighing launching crypto services, as a sign that it is becoming mainstream.
“Bitcoin is a messiah,” said Cristian Cabrera, a 37-year-old self-styled cryptocurrency adviser from Argentina, as he ate lunch at Bitcoin Embassy, Mexico City’s first crypto café. “It represents equality for everyone.”
“We are building the infrastructure for the economy of the future,” said Emiliano Grodzki, chief executive of Bitfarms, a bitcoin mining firm he co-founded in Toronto after suffering inflation and devaluations in his native Argentina.
“In this new ecosystem, we replace central banks . . . it’s a totally new paradigm,” he told the FT after his company listed on the Nasdaq in June.
In Mexico, Ricardo Salinas, the country’s third-richest man, said he holds 10 per cent of his liquid portfolio in bitcoin. He voiced his support for the currency on Twitter in June and said he was working to make his Banco Azteca the country’s first bank to accept it.
Within a day, however, the central bank, finance ministry and banking regulator shot back, saying Mexican banks are not authorised to offer operations in bitcoin and warning of risks.
Despite the scepticism, advocates remain determined. Lorena Ortiz, owner of Bitcoin Embassy, a bar in Mexico City, counts clients as old as 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