El Salvador, the IMF, and Bitcoin: Compliance or Defiance?

El Salvador’s Bitcoin Experiment: Context & Origins

El Salvador has a long and championed history with digital currencies. The country was the first in the world to make Bitcoin (BTC +0.32%) legal tender, meaning that every business has to accept the cryptocurrency. This law placed Bitcoin on par with USD, which the nation adopted as currency in 2001.

Notably, at that time, USD was seen as the best way to stabilize the economy. Now, Bitcoin is seen as a smart way to combat inflation. As such, President Nayib Bukele moved to integrate Bitcoin formally into his nation’s economy.

At the time, this maneuver was criticized by the IMF and led to tensions between the country and international financial institutions. Notably, the IMF has been vocal in its opposition to cryptocurrencies. In the past, their arguments have focused on volatility, lack of consumer protections, and no legal framework.

El Salvador Stayed the Course

El Salvador’s government managed to stave off the IMF’s concerns for the last 5 years. During this time, the country has made several large Bitcoin acquisitions. Currently, the nation holds 7,509 Bitcoin. These reserves continue to expand with the nation’s president sharing plans to buy 1 Bitcoin daily.

Source – Swiss Info

Notably, the nation added more than 1,000 Bitcoin to its balance sheet during the recent market dip, demonstrating its capability to take advantage of conditions. Impressively, this strategy has worked out very well for the nation, which has secured an estimated $300-$475M in unrealized profit.

Forced to the Negotiating Table

However, the nation was forced to come to the negotiating table when it sought an Extended Fund Facility (EFF) loan. The package, which was approved earlier this year with stipulations such as regular reviews, included an immediate cash disbursement alongside an additional $1.4B in multilateral aid.

IMF Demand: Confining Bitcoin Integration

At the top of the list of IMF demands was an immediate cease and confinement of Bitcoin integration. This included a major drawdown in the government’s affiliation with the Chivo Wallet, which was instrumental in its Bitcoin legalization strategy in 2021.

Chivo Wallet

This Lightning Network-capable ecosystem was used to provide every citizen with $30 in Bitcoin during the nation’s educational campaign. It was approved by legislators and was seen as a smart way to enhance access to under-banked citizens.

The wallet was integrated into the nation’s immigration policy as well. Foreigners who invest $1 million in Bitcoin or Tether (USDT +0.03%) into the country now qualify for the “Freedom Visa” residency program. Despite its many features, the wallet did receive a lot of criticism during its launch due to several technical glitches that were later remedied.

Negotiations Underway

As part of their agreement, the government will reduce its participation in Chivo and sell off its interests. To that extent, the IMF has stated that negotiations are currently underway and that they expect to see a decoupling from the nation’s government shortly.

No Longer Legal Tender

Another anti-Bitcoin clause insists that the country’s merchants gain the ability to voluntarily accept Bitcoin, versus its current status as legal tender. This goes alongside a broader push to limit Bitcoin acceptance in the public sector.

IMF Condition: Halting Bitcoin Reserve Accumulation

Not surprisingly, the IMF also wants El Salvador to stop building up its Bitcoin reserves. The nation is to halt all further acquisitions as one of the core conditions of their loan package. It’s this stipulation that jeopardizes the nation’s deal.

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Is El Salvador Really Exiting the Bitcoin Market?

While the IMF continues to tout how it bullied El Salvador out of the Bitcoin sector, the nation’s president remains vocal about building up the country’s reserves. Just this December, the nation’s Bitcoin office announced the acquisition of 1,090 Bitcoin.

This purchase falls in line with what the President stated regarding his nation’s goal to purchase 1 bitcoin a day moving forward. These activities have led IMF members to question if El Salvador is capable of keeping to its commitments and what actions must be taken if it doesn’t adhere to the agreements.

Second IMF Review Process

The IMF has set in place several reviews along the loan package timeline. The organization is set to review the nation’s commitments again in the coming months. These reviews will examine progress and whether or not to release more funding.

Discussing the agreement, Mr. Torres, Mission Chief for El Salvador, praised the progress his nation has made regarding the Chivo Wallet sale. He also touched on the second review and how his country is committed to full transparency, protecting public resources, and reducing risk exposure.

Financial Stability Reforms

The IMF loan package also includes several reforms designed to provide stability to the nation’s economy. These reforms include a new banking framework, deposit insurance strategies, and net stable funding. They also integrate AML/CFT regulations, aligning the nation with international standards.

Is El Salvador Selling Its Bitcoin Reserves?

Despite the growing pressure, El Salvador seems to have no intention of selling its growing Bitcoin treasury. From their perspective, they are up hundreds of millions and have seen a massive influx of investment capital from the blockchain sector. As such, there’s no hurry to decouple from this booming economy.

Economic Growth

The IMF loan package has served its purpose in that the nation continues to experience economic growth. Notably, the country has fared better than expected, with some analysts predicting a 4% rise in national GDP since the approval, with more growth expected in 2026.

Future Implications for Other Nations

As the first country to make Bitcoin legal tender and as a USD-based economy, El Salvador’s success or failure will have major ramifications moving forward. More nations are seeking to integrate Bitcoin reserves, which has led the IMF to fear that more countries will start to consider making the cryptocurrency legal tender.

In the case of El Salvador, it will likely privatize its Bitcoin business investments in a manner that doesn’t limit their profitability but meets the letter of the law. Now, whether the maneuver meets the spirit of the law is an entirely different question, with anti-crypto advocates claiming the nation is not serious about dropping Bitcoin.

El Salvador – Lighting the Path Forward

When you examine Bitcoin’s impact on El Salvador and how the nation managed to utilize its support to maximize foreign investment, it’s easy to see why more countries want to participate in the market. If the nations continue to secure unrealized gains on their holdings, it makes even more sense for other countries to follow suit.

However, Bitcoin cannot be printed when needed like IMF loans, meaning that keeping Bitcoin from rising helps to ensure the IMF’s relevance.

What do you think about the IMF/El Salvador loan stipulations? Do you think the nation will drop Bitcoin, or simply alter its approach to secure the funding while continuing to stack sats? Click here for more interesting digital asset news.