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A representation of the Bitcoin virtual cryptocurrency can be seen in this photo illustration taken on June 7, 2021. REUTERS / Edgar Su / Illustration
Pressure from Salvadoran 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 on Saturday he would send a Bitcoin bill to Congress in the coming days, touting its potential to help Salvadorans living abroad send funds home. Read more
El Salvador’s top trade official said the US dollar will continue to be legal tender, stressing that bitcoin transactions will be by choice and tied to the dollar’s exchange rate.
This could further complicate the Central American country’s quest to secure a more than $ 1 billion program with the IMF. In May, Bukele’s party strained its relations with Washington when it ousted five Supreme Court justices and the top prosecutor.
Trade and Investment Minister Miguel Kattan said bitcoin was already of limited use in El Salvador, even to buy pupusas, the national street snack.
“The possibility of trading with Bitcoin should not be of concern,” Kattan said at a press conference.
Still, analysts have seen problems with the switch to bitcoin.
“President Bukele’s recent tweets to fully embrace bitcoin as legal tender will further complicate and likely delay IMF technical discussions,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpoint Securities.
“It may just reflect a long-term initiative or maybe even just a flashy PR tactic, but it shows a lack of coordination with impulsive announcements that contradict a cohesive economic plan,” she said, adding that Salvadoran bonds faced a Bukele risk premium of as much as 75 basis points over comparable Costa Rican bonds.
The JPMorgan EMBI Global Diversified Index showed that the premium required of investors to hold El Salvador hard currency bonds over US Treasuries widened by 28 basis points to 610 basis points (.JPEGDELSR). The 21-day average is a movement of less than 1.3bp per day.
El Salvador’s dollarized economy relies heavily on money returned by expatriate workers. Data from the World Bank showed that remittances to the country amounted to nearly $ 6 billion, or about one-fifth of GDP in 2019, one of the highest ratios in the world.
The IMF’s chief of mission for El Salvador, Alina Carare, said Monday evening that the fund “is following the news and would have more information as we continue our consultations with the authorities”.
Carlos de Sousa, portfolio manager at Vontobel Asset Management, said the bitcoin push seemed reckless as Bukele could shoot himself in the foot by making it harder to collect tax revenue.
“Cryptocurrencies are overall a very easy way to avoid taxation and a very easy way to just avoid the authorities because it is a completely decentralized system, you can do money laundering, you can do tax evasion and so on, ”he said, adding that he remained to see what the IMF thought of Bukele’s incursion.
“Usually he gets a lot of positive reactions on Twitter and the reactions to it were kind of like, ‘Mr President, okay, where can we read about this? What does that mean ? – so people don’t really understand. “
Bukele changed his Twitter profile picture over the weekend to give himself the red laser eyes used by cryptocurrency supporters on social media.
“A satellite infrastructure to be built, helping rural Salvadorans to connect to the Internet, and therefore to the Bitcoin network, in places where terrestrial connectivity is weak. @Blockstream plans to bring its expertise and technology to make the nation a model for the world, “Bukele said on Twitter Monday, in a retweet from a Bitcoin Documenting @DocumentingBTC article.
Justin Sun, founder and CEO of TRON, a blockchain-based company focused on building a decentralized internet, said his company would become the “first crypto organization” to establish an office in El Salvador.
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