An Overview Of El Salvador's Bitcoin Clash With The IMF

This was met with a lot of reactions from the local and international cryptocurrency communities, both positive and negative reactions, which led to large-scale protests over fears that Bitcoin's volatility and lack of effective regulation will bring instability and inflation to the country.

Shortly after, El Salvador allocated a total of $203 million in public funds to support its bitcoin plan. Additionally, the government has made it a priority to purchase the cryptocurrency whenever there is a decline in its price on the market, with the immediate purchase of its first 400 units of bitcoins, followed by another 150, for a total value of $26 million.

Two months later, the President of El Salvador made public the plans for constructing a Bitcoin city at the base of a volcano in the country, with the cryptocurrency serving as the primary source of funding for the endeavor.

Clash with the International Monetary Fund (IMF)

Nearly a month after the congress of El Salvador accepted Bukele's proposal to adopt bitcoin throughout the country in June 2021, the International Monetary Fund issued a warning to countries not to adopt cryptocurrencies as legal currency, citing concerns about the impact on financial stability.

El Salvador had been in discussions with the IMF since March 2021 in the hopes of securing a loan of $1.3 billion to assist the country in dealing with its debts. There were concerns from economists that the Bitcoin adoption would complicate the IMF's deal. But according to Douglas Rodriguez, the president of El Salvador's central bank, this wasn't going to be an issue in the deal as Bitcoin's use as a legitimate payment system was part of the country's pitch in negotiations with the IMF.

In November 2021, the IMF gave cautionary advice to El Salvador's adoption of Bitcoin after its staff made a visit to the nation.

“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender,” the IMF said in a statement. “Recently announced plans to use the proceeds of new sovereign bond issuances to invest in Bitcoin, and the implications of trading more broadly in Bitcoin, will require a very careful analysis of implications for, and potential risks to, financial stability,” it continued.

The most recent disagreement between El Salvador’s bitcoin adoption and the IMF is the financial institution's urge for El Salvador to remove bitcoin as legal tender in January 2022. This came after the cryptocurrency lost about half its market value compared to the record of $67,734 hit in November. According to a statement, the IMF Board's directors “urged the authorities to narrow the scope of the bitcoin law by removing bitcoin’s legal tender status.” 

The financial institution also suggested that El Salvador liquidate the trust fund it established when it decided to accept Bitcoin as a form of legal cash and transfer any of the unused funds to its national treasury.

Although many people claim that the IMF's actions are motivated by a desire to defend monetary policies that it can control, the concern might be justified due to Bitcoin's volatility and lack of clear regulation. The IMF appears reluctant to give funding until adjustments are made, but El Salvador's government is unyielding. Since the beginning of its optimistic acquisitions, the Bukele administration has spent $103 million on 2,301 bitcoins. These coins are now valued at approximately $68 million, a loss of almost $35 million.