The President of El Salvador’s Bitcoin push casts shadows over the IMF’s efforts

© Reuters. FILE PHOTO: A representation of the virtual cryptocurrency Bitcoin can be seen in this image from June 7, 2021. REUTERS / Edgar Su / Illustration

By Karin Strohecker and Tom Arnold

LONDON (Reuters) – A push by El Salvador’s President Nayib Bukele to make his country the first in the world to officially adopt Bitcoin as legal tender has raised concerns about the prospects for his program with the International Monetary Fund (IMF).

Bukele said Saturday he would send a Bitcoin bill to Congress in the coming days to announce their potential to help Salvadorans living abroad send money transfers home.

El Salvador’s chief trade official said the US dollar would continue to be legal tender and underlined that bitcoin transactions are voluntary and tied to the dollar.

This could further complicate efforts by the Central American country to work with the IMF on a program worth more than one billion US dollars. In May, Bukele’s party strained relations with Washington when it removed five Supreme Court justices and the chief prosecutor.

Trade and Investment Minister Miguel Kattan said Bitcoin had already been used on a limited scale in El Salvador, even to buy pupusas, the national street snack.

“The ability to conduct operations with Bitcoin should not raise concerns,” Kattan said at a press conference.

Still, analysts saw problems with the switch to Bitcoin.

“President Bukele’s recent tweets to fully accept Bitcoin as legal tender are likely to further complicate and delay the IMF’s technical discussions,” said Siobhan Morden, head of Latin America bond strategy at Amherst Pierpoint Securities.

“This can only reflect a long-term initiative, or maybe even just a flashy PR tactic; however, it shows a lack of coordination with impulsive announcements that contradict a coherent economic plan, “she said, adding that Salvadoran bonds face a bukel risk premium as much as 75 basis points over comparable Costa Rican bonds.

JPMorgan (NYSE 🙂 The global diversified index EMBI showed that the premium bonds demanded by investors held El Salvador’s hard currency bonds against US Treasuries and widened by 28 basis points to 610 basis points. The 21-day average is a movement below 1.3 bps per day.

El Salvador’s dollar economy is heavily reliant on funds returned by foreign workers. World Bank data showed that remittances to the country amounted to nearly $ 6 billion, or about a fifth of GDP, in 2019, one of the highest rates in the world.

IMF head of mission for El Salvador Alina Carare said late Monday that the fund “will follow the news and receive more information as we continue our consultations with the authorities”.

Carlos de Sousa, a portfolio manager at Vontobel Asset Management, said the Bitcoin boost looked ill-considered as Bukele could potentially shoot itself in the foot by making it harder to increase tax revenues.

“Overall, cryptocurrencies are a very easy way to avoid taxes and bypass the authorities simply because it’s a completely decentralized system, money laundering, tax avoidance and so on,” he said, adding that it stayed to see what the IMF thought of Bukele’s move.

“He usually gets a lot of positive reactions on Twitter and the reactions to that have been like, ‘Mr President, okay, where can we read this? What does that mean?’ – people don’t really understand it like that. “

Bukele changed his Twitter profile picture over the weekend to give himself red laser eyes, which are used by followers of cryptocurrency on social media.

“A satellite infrastructure is to be built that will help rural El Salvadorans to connect to the Internet and thereby network in places where land-based connectivity is poor. @Blockstream plans to contribute their expertise and technology to make the nation a model for the world. ”Bukele said on Monday on Twitter in a retweet of a Documenting Bitcoin @ DocumentingBTC post.

Justin Sun, founder and CEO of TRON, a blockchain-based company focused on building a decentralized Internet, said his company would be the “first crypto organization” to set up an office in El Salvador.

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