The rejection is the latest sign that President Nayib Bukele’s ambitions to bring El Salvador into a new age of prosperity through the use of volcano-powered bitcoin may be less realistic than he would like to admit. El Salvador’s new law, which will require merchants to accept bitcoin as a form of payment beginning in three months, was passed with little debate just days after Bukele proposed the idea at a Miami bitcoin conference. Now as the government begins to figure out exactly what the experiment will entail, global financial institutions are expressing hesitation.
El Salvador’s finance minister, Alejandro Zelaya, had told reporters Wednesday that the government hoped to receive technical assistance from the World Bank, as well as advice on coming up with standards for the use of the cryptocurrency. The organization distributes billions of dollars to developing nations through loans and grants each year, and its involvement in El Salvador’s bitcoin plan would have been seen as a sign that the experiment was backed by powerful players in the international development world.
The International Monetary Fund, which is weighing a separate request for more than $1 billion in funds from El Salvador, has also expressed skepticism about the country’s embrace of bitcoin and said that it “raises a number of macroeconomic, financial and legal issues that require very careful analysis.” Some analysts warn that concerns about the decentralized, unregulated cryptocurrency could prompt the IMF to reject El Salvador’s appeal.
Bukele argues that adopting bitcoin will allow the country to see a larger share of the estimated $6 billion in remittances that are sent home by Salvadorans working abroad each year, though experts have expressed doubt that the highly volatile cryptocurrency will take the place of traditional money transfer services. He also has touted El Salvador as an attractive destination for cryptocurrency entrepreneurs, pointing out that Google searches for “real estate in El Salvador” skyrocketed after he announced plans to make bitcoin a form of legal tender.
Despite fears that the widespread use of bitcoin could facilitate money laundering and tax evasion, politicians in Mexico and Panama have proposed following El Salvador’s lead. Meanwhile, major world powers — most notably China — are cracking down on bitcoin mining because of the extraordinary amount of electricity used by computers in the process.
Within El Salvador, the practical implications of the new law have become a major source of confusion. This week, one government minister suggested that workers’ salaries might be paid in bitcoin, only for another to emphatically rule out that possibility the following day. While the government plans to set up a trust that will allow citizens to convert bitcoin into U.S. dollars, which will remain El Salvador’s primary currency, it’s not clear how the exchange rate will be determined.
El Salvador plans to work with the Central American Bank for Economic Integration to figure out exactly how the law will be implemented, including what safeguards can be used to prevent bitcoin from being used for illicit purposes, the Salvadoran newspaper El Mundo reported this week. The bank’s president, Dante Mossi, has said that outside experts will be brought in to help consult on best practices.
Some critics believe that Bukele’s attention-grabbing announcement was intended to distract from the fact that he is facing international condemnation for his party’s ouster of the country’s top judges and attorney general. El Salvador also pulled out of an anti-corruption agreement with the Organization of American States this month, heightening fears of an authoritarian power grab.
Global ratings agencies and investment firms have also sounded a note of caution. In a note to clients this week, the New York-based firm Amherst Pierpont Securities warned that “the recognition of a ‘Bukele’ risk premium has probably done some permanent damage to investor sentiment,” according to Reuters.