IMF warns against cryptocurrency as national currency ahead of El Salvador launch | World Weekly
The International Monetary Fund has warned countries that use cryptocurrency as legal tender, just over a month before El Salvador is set to become the first country in the world to allow bitcoin to pay for everything from haircuts to taxes.
The Washington-based lender said in a blog post in late July that widespread use of cryptocurrencies would threaten “macroeconomic stability,” and possibly also harm financial integrity, through crypto links to illicit activity.
The IMF did not refer to El Salvador directly. But as it is in talks with the Latin American country over a $1 billion loan, her warning is that 40-year-old President Najib Bukil’s plans may complicate relations.
“I don’t think they have thought about all the implications of that,” said Ricardo Castaneda, chief economist and El Salvador coordinator at Icefi, a think-tank. “It is an experiment. It will be interesting to see if it works or not, but the implications, if it does not work, will be very serious.”
Bukele is launching a legal tender for Bitcoin starting September 7. He claims this will unleash prosperity and provide a “great leap forward for humanity”.
His plan is based on a pilot scheme at “Bitcoin Beach,” a surfing resort where locals are paid with bitcoin and use it for daily transactions. It was launched in 2019 with the support of an anonymous bitcoin donor in the United States.
The president claims that nationwide adoption of cryptocurrency will help 70 percent of the population without access to traditional financial services in a country that adopted the dollar two decades ago. He did not rule out putting some central bank reserves into cryptocurrencies.
He wants to use geothermal energy from volcanoes to mine bitcoin in the country, although details remain murky. He also launched an e-wallet called Chivo – a Salvadoran slang word for “cool” – that will provide people with $30 worth of bitcoin to incentivize their use. Bitcoin ATM operator Athena is said to be setting up 13 machines in malls.
But the World Bank has refused to help with the introduction of bitcoin in El Salvador and the IMF has previously warned of “macroeconomic, financial and legal issues that require very careful analysis.”
The plans have left many in the financial world baffled, as well as Salvadorans.
Bond prices fell in response. Meanwhile, the country faces a “critical” financial situation, with debt at 89 percent of GDP, a 2020 fiscal deficit of 10.1 percent of GDP and $2 billion in debt repayments due this year, Castaneda added from Ivy.
In a poll conducted by the El Salvador Chamber of Commerce and Industry, more than 90 percent of respondents did not want to be forced to accept bitcoin as payment and three-quarters pledged to continue using the dollar. a vote By Francisco Gavidia University it was found that 44 percent expect it to make the economy worse.
“I assume uptake will be limited,” said Risa Grace Targo, Latin America director at Eurasia Consulting Group. “There are still a lot of questions about whether this can really take off.”
But crypto proponents argue that Latin America’s history of financial meltdowns and hyperinflation makes the entire region an ideal crypto melting pot as ordinary people search for ways to protect themselves from volatile economic events.
Argentina is grappling with an unsustainable debt burden and the regular threat of default, while Venezuela’s economy has shrunk 75 percent since 2013. The official exchange rate is 3.3 million bolivars per dollar (the black market rate is in the billions) and annual inflation is more than 2,600 percent.
“With bitcoin, for the first time in a very long time, people in Latin America have seen a rise in a dollar asset,” said Mauricio Di Bartolomeo, CEO of Ledn, a Toronto-based digital asset firm.
“People in Latin America have taken their farms and seen banks collapse overnight, so in a way bitcoin is more secure than other assets.”
Bitcoin believers are pointing to banks like Citi, which are considering launching crypto services, as an indication that they are becoming mainstream.
“Bitcoin is the Messiah,” said Cristian Cabrera, a 37-year-old crypto consultant from Argentina, while having lunch at the Bitcoin Embassy, Mexico City’s first crypto cafe. “It represents equality for all.”
“We are building the infrastructure for the economy of the future,” said Emiliano Grodzki, CEO of Bitfarms, a bitcoin mining company he co-founded in Toronto after experiencing inflation and currency depreciation in Argentina.
In this new ecosystem, we are replacing central banks. . . It’s a whole new paradigm, he told the Financial Times after his company’s Nasdaq listing in June.
In Mexico, Ricardo Salinas, the third richest man in the country, said he owns 10 percent of his liquid bitcoin portfolio. Support for the currency was expressed on Twitter In June he said he was working to make his Bank Azteca the first bank in the country to accept him.
However, within a day, the Central Bank, the Ministry of Finance and the banking regulator responded, saying that Mexican banks are not authorized to offer bitcoin operations and warning of the risks.
Despite the skepticism, proponents remain determined. Lorena Ortiz, owner of Bitcoin Embassy, a bar in Mexico City, counts customers aged 78 and as young as 16. “It’s here to stay.”
Additional reporting by Gideon Long in Bogota