Bitcoin, the IMF, and Bukele

A recent surge in the price of Bitcoin has increased the value of El Salvador's Bitcoin reserves and led president Nayib Bukele to say "I told you so."  The value of the country's declared Bitcoin reserves is around $575 million.   At the same time, to obtain a loan from the International Monetary Fund (IMF), Bukele is being required to dismantle key parts of his Bitcoin law and cut back on government spending.

The price of Bitcoin increased 50% after the election of Donald Trump to all time highs above $100,000 US.  Since Bitcoin hit $100,00 on December 4, Nayib Bukele has been regularly patting himself on the back on social media:  

Despite the surge in the value of Bitcoin as an investment asset held by El Salvador in its reserves. the digital asset never caught on as the form for ordinary daily cash transactions in El Salvador. 

One of the major skeptics of the designation of Bitcoin as legal tender in El Salvador and Bukele's large investments in the crypto-currency, has been the IMF.  The adoption of the Bitcoin law in the country put a major stumbling block in the way of El Salvador's hopes to obtain a $1.4 billion loan from the institution.

But after a three year delay, earlier this month, the IMF announced that it had reached preliminary agreement with El Salvador on the terms of a loan package.  Those terms will include reforming key parts of the Bitcoin law. The agreement unwinds some major features of the Bukele's 2021 Bitcoin initiative:

The potential risks of the Bitcoin project will be diminished significantly in line with Fund policies. Legal reforms will make acceptance of Bitcoin by the private sector voluntary. For the public sector, engagement in Bitcoin-related economic activities and transactions in and purchases of Bitcoin will be confined. Taxes will only be paid in U.S. dollars and the government’s participation in the crypto e-wallet (Chivo) will be gradually unwound. Transparency, regulation, and supervision of digital assets will be enhanced to safeguard financial stability, consumer and investor protection, and financial integrity.

Thus Bitcoin will no longer be legal tender in El Salvador since no entity needs to accept payment in Bitcoin and taxes cannot be paid with Bitcoin.  While the Bitcoin Office in El Salvador claims that Bitcoin will remain legal tender, that assertion turns the definition of legal tender on its head.

To be sure, the Salvadoran government never enforced the highly unpopular provision of the law which was supposed to require all business to accept Bitcoin in payment for any transaction.  Except for the sectors of the economy serving vacationing or newly-arrived foreigners, Bitcoin is not in every day use in El Salvador.

The director of the National Bitcoin Office, Stacy Herbert, posted on social media that Chivo Wallet would be privatized.   

It is not clear what the phrase in the IMF press release "purchases of Bitcoin will be confined" signifies.  The same day the IMF deal was announced, Bukele's "National Bitcoin Office" posted that the government continues to buy one bitcoin every day to add to its reserves.  The following day, there was a post stating that the government could actually be accelerating its Bitcoin purchases, and the government followed by adding 23 more BTC to its reserves worth more than $2 million.

Besides the Bitcoin reforms, the IMF is also calling on the Salvadoran government to make significant improvements in its financial position which has seen the country's debt increase significantly during Bukele's time in office.   The IMF description of the agreement points to required reductions in deficit spending by the Salvadoran government, calling for a reduction in the budget deficit by 3.5% of GDP or $1.25 billion over three years, noting that El Salvador's debt hit a record level in 2024.

To accomplish those reductions, the Legislative Assembly adopted a budget for 2025 which cuts some 11,000 public jobs and reduces the money allocated to both the education and healthcare sectors.  The overall budget increases by some $600 million.