El Salvador adopted BTC as legal tender in September of 2021. A communique issued by the Executive Board of the IMF contained the suggestion. It follows an annual report on El Salvador prepared by an IMF team that visited the country to conduct bilateral talks with the government.
The Executive Board stated that: “The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.”
Exactly what that means is not immediately clear. What is clear is that the IMF, “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.”
Oddly, the IMF had praise for the Chivo Wallet that provides the mechanism for Salvadoran citizens to hold and transact with BTC, “Directors agreed on the importance of boosting financial inclusion and noted that digital means of payment—such as the Chivo e-wallet—could play this role.”
The rapid adoption of the Chivo wallet has been a significant development. Other governments are likely trying to gauge if their Central Bank Digital Currencies (CBDC’s) will have the same uptake via electronic payments systems like Chivo. That cannot be inferred from the El Salvador experience as BTC is likely to be popularly viewed as “Freedom Money” that is distinct from the government, whereas CBDC’s are essentially making the government everyone’s banker.
Nayib Bukele, President of El Salvador, appears unfazed by the IMF’s request to drop BTC. Alejandro Zelaya, the Minister of the Treasury (Ministro de Hacienda), went further and indicated that El Salvador would not be dictated to by any international body.
The IMF is an organization that lends to countries, often as a last resort. As such the IMF has been known to place restrictions on countries that, in the past, have violated national sovereignty–especially in the Third World. The organization is part of the Bretton Woods framework established after World War II. Incidentally, the IMF has its own quasi-currency called Special Drawing Rights (XDR).
The IMF’s criticism of EL Salvador’s adoption of BTC was in contrast to its praise for sound management of the economy and of the pandemic. The Salvadoran economy grew by an estimated 10% in 2021. Thus, it seems difficult to make the argument that adoption of BTC has been bad for the Central American nation.
A crypto-unfriendly IMF could wield a lot of clout in the Third World, as it attempts to stamp out further adoption of crypto as legal tender. The obvious threat would be: a country which adopts crypto would not get any IMF loans. To be fair, the IMF is not saying this outright, but you get the drift.