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Cash-strapped south American country agrees to sell or discontinue its national Bitcoin wallet after signing deal with IMF
El Salvador’s dalliance with the digital currency Bitcoin could be on the wane, after an agreement was struck with the International Monetary Fund (IMF).
Reuters has reported that the cash-strapped nation has agreed that it’s official bitcoin wallet (known as Chivo) will be sold or discontinued. The IMF said Chivo would be “gradually unwound” as part of its deal with the country.
El Salvador had made history in 2021 when it became the first country in the world to accept Bitcoin as a legal tender, after the digital currency was officially adopted on Tuesday 7 September 2021.
Legal tender
The El Salvador Parliament had agreed in June 2021 to back President Nayib Bukele’s drive to embrace the cryptocurrency.
However the move was extremely controversial at the time, and resulted in large-scale protests and fears it would bring instability and inflation to the impoverished nation.
Indeed, the World Bank (the international lender to developing nations) refused to help El Salvador implement it as legal tender, due to concerns over transparency and the environmental impact of Bitcoin mining.
And in January 2022 the IMF had urged El Salvador to reverse its decision to make Bitcoin legal tender.
Rating agency Fitch also warned of greater risks for banks, and said the move could open floodgates to money laundering, increase banks’ exposure to regulatory risks.
Despite this President Bukele pressed ahead with the Bitcoin adoption, and in November 2021 he even proposed building a brand new city financed by government Bitcoin bonds.
Impoverished nation
Essentially President Bukele saw Bitcoin as a way to help low income countries like El Salvador move from a largely cash economy, to a digital economy, where a person’s bank account is essentially their smartphone.
It should be noted that roughly 70 percent of people in El Salvador do not have bank accounts or credit cards.
The country had replaced its its local currency, the colón, with the US dollar in 2001.
Historically the country had a mostly agriculture-based economy, but it has been riven chronic political and economic instability including coups. It has also struggled with high rates of poverty, inequality, and gang-related violent crime.
Remittances are said to account for more than 20 percent of El Salvador’s GDP, and prior to Bitcoin’s adoption, incumbent services could charge 10 percent or more in fees for international transfers that take days to arrive and had to be collected from a physical location.
IMF deal
But now short on cash, El Salvador has said that it’s official digital bitcoin wallet (Chivo) will be sold or discontinued, Reuters quoted an official saying on Thursday, a day after it struck an agreement with the IMF.
Stacy Herbert, director of the national bitcoin office, was quoted as saying that the cryptocurrency would remain a legal tender and that the government would continue to buy it, possibly at an accelerated pace, for its strategic reserves.
El Salvador had on Wednesday struck a $1.4 billion loan deal with the IMF after agreeing that it would scale back its bitcoin policies.
“The Salvadoran authorities and a staff team from the IMF have reached staff-level agreement on a 40-month extended arrangement under the Extended Fund Facility (EFF) for about US$ 1.4 billion (equivalent SDR 1,033.9 million, or 360 percent of quota) to address balance of payment needs and support the government’s economic reforms,” said Luis Cubeddu, IMF Deputy Director of the Western Hemisphere Department, and Raphael Espinoza, Mission Chief for El Salvador.
“The agreement is subject to approval by the IMF’s Executive Board, and contingent on the implementation of the agreed prior actions,” they stated.
“The program is also expected to catalyse additional financial support from the World Bank, the Inter-American Development Bank, and other regional development banks (Central American Bank for Economic Integration, CABEI, Development Bank of Latin America and the Caribbean, CAF) for a combined overall financing package of over US$3.5 billion over the program period,” they added.
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