El Salvador Bitcoin scheme could torpedo $1.3B IMF loan, analysts warn

El Salvador president Nayib Bukele announced Bitcoin would be legal tender in the country via video link to Miami's Bitcoin 2021 conference.

El Salvador plans to be the first ever country to adopt Bitcoin as legal tender, but it could put the Latin American nation on a collision course with the International Monetary Fund (IMF).

The country’s president Nayib Bukele announced the move on Saturday via video broadcast to the Bitcoin 2021 conference in Miami.

By Tuesday night, El Salvador’s congress had given Bukele the green light.

As stated in the new bill, Bitcoin will be unrestricted legal tender in El Salvador with no limit on transactions.

  • Markets will determine Bitcoin’s US dollar exchange rate.
  • Bitcoin purchases won’t be subject to capital gains tax.
  • Vendors must accept Bitcoin (provided they have the required tech).

The bill also specified the state will provide training and equipment (like internet infrastructure) to give citizens more opportunity to use Bitcoin.

El Salvador says it will also create a special fiat trust to guarantee liquidity. This will ensure merchants can always immediately convert Bitcoin they receive to US dollars (El Salvador’s currency).

As reported by Reuters, there’s hope that El Salvador adopting Bitcoin will bring multiple benefits.

Chiefly, it could make it easier for Salvadorans working overseas to send money back home. According to the World Bank, those remittances equaled around 20% of the country’s GDP in 2019.

Bukele also claimed the move could boost El Salvador’s overall economic development. Bitcoin would make financial services more accessible to 70% of the country’s population who don’t have bank accounts.

El Salvador’s Bitcoin ‘contradicts a cohesive economic plan’

But despite the slick sales pitch, El Salvador’s Bitcoin plight may inject a spanner into the $1.3 billion loan it requested from the IMF.

Bukele has angled for the loan — said to rejuvenate its economy — since March.

But now that Bitcoin is on the table, those funds reportedly could face interruptions and even derail completely.

IMF head of mission to the nation Alina Carare told Reuters it was “following the news and will have more information as we continue our consultations with the authorities.”

Bitcoin 2021 video timestamped to Bukele’s announcement.

[Read more: South Korean banks still refuse to help most crypto exchanges]

“Recent tweets from President Bukele to fully embrace Bitcoin as legal tender will likely complicate and delay IMF technical discussions,” said a market analyst (our emphasis).

“This shows lack of coordination with impulsive announcements that contradict a cohesive economic plan.”

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