Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
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IMF Pressuring El Salvador to Limit BTC Exposure
Bitcoin | Oct 7, 2024
Image: Freepik/pvproductions
During Funding Negotiations, the International Monetary Fund (IMF) Urges El Salvador to Limit Bitcoin Exposure
In 2021, El Salvador become the first government to declare Bitcoin as a legal currency much to the chagrin of IMF. Now during fresh funding/debt related discussions, the IMF is urging El Salvador to restrict the usage of crypto and enhance its regulatory framework to limit exposure to Bitcoin.
See: IMF 9 Point Action Plan for Crypto Asset Treatment: Recommends Against Legal Tender Status
The IMF has been critical of El Salvador's Bitcoin adoption since the start, highlighting risks to financial stability, economic growth, and transparency. Previously, the IMF called for the full dissolution of the country's bitcoin law to mitigate risks but the IMFs latest transcript press briefing is now urging El Salvador to narrow the law's scope to reduce public exposure to crypto.
Julie Kozack, IMF Director of Communications:
"With respect to the details on bitcoin what we have recommended is a narrowing of the scope of the bitcoin law, strengthening the regulatory framework and oversight of the bitcoin ecosystem, and limiting the public sector exposure to bitcoin."
El Salvador and Bitcoin
As part of its bold efforts to incorporate Bitcoin into its banking system, in November 2022 El Salvador's President Nayib Bukele announced that it would commit to purchasing 1 BTC daily until it becomes unaffordable with fiat currencies. As of October 7, 2024, according to it's bitcoin office website, El Salvador owns over $376 million in Bitcoin, and according to Cointelegraph, the country was approx $31 million in profit after 3 years of implementing it's crypto banking strategy.
See: El Salvador Update: ‘Volcano Bonds’, Bitcoin City, Crypto Visa Program
Further, as per Forbes, President Bukele indicated that it would not include fresh debt issuance in its 2025 national budget, hinting that the country is preparing for the prospect of not receiving IMF funding despite the IMF investigating the country's crypto products like its Volcano Bonds.
Having said that, there are ongoing talks between El Salvador and the IMF to help boost productivity, improve governance, and stabilize the economy.
Domestic Perspectives
Crypto advocates in El Salvador feel that the Bitcoin regulation has changed the country's reputation abroad. According to John Dennehy, creator of the educational non-governmental organization Mi Primer Bitcoin, Bitcoin has changed how people throughout the world view El Salvador, dispelling previous myths about its instability and violence. And according to Lina Seiche, the inventor of "Little Hodler" the country has benefited from more investment and tourism since legalizing bitcoin assets.
See: Tax-Free Bitcoin Zone Proposed by the USABTC
Conclusion
If El Salvador can strike a compromise with the IMF in following some of the IMFs recommended regulations while also keeping its Bitcoin policies in place, it may be a pathway forward while establishing a precedent on the integration of cryptocurrencies with established financial institutions around the world.
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