El Salvador’s recent $1.4 billion bailout by the International Monetary Fund (IMF) aimed to cut short President Nayib Bukele’s unwieldy cryptocurrency goals and their toll on the country’s worsening debt crisis. Observers declared that El Salvador’s bitcoin project was dead. But the country’s continued bitcoin purchases threaten to break the IMF’s rules. The fund’s lackluster response risks not only El Salvador’s economic stability, but also the IMF’s own credibility.
The Bitcoin Project’s Poor Fundamentals
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El Salvador’s bitcoin project earned the praise of cryptocurrency spectators, who have closely watched Bukele. Despite Bukele’s attempts to promote bitcoin, few Salvadorans used it, and the gambit only worsened the country’s economic woes.
The Salvadoran government now holds nearly $550 million—15 percent—of its foreign exchange reserves in bitcoin. But bitcoin’s price is volatile. It fell over $30,000 from its December peak of $106,490 before rising again in April and May. When the cryptocurrency market was routed in 2022, the risk of these holdings contributed to El Salvador’s debt crisis. The threat of money laundering and bitcoin’s price instability worsened the spread in El Salvador’s government bonds compared to U.S. treasuries.
The IMF was right to end El Salvador’s bitcoin project in its bailout. That’s why the Extended Fund Facility (EFF) did not just end bitcoin’s legal status. It also constrained government participation in cryptocurrency and the Chivo e-wallet. Yet days after inking the deal, Bukele posted on X a screenshot of El Salvador’s strategic reserve purchasing a bitcoin, captioned “It’s not stopping.”
When asked if El Salvador’s recent bitcoin purchases violated the EFF, the fund backed down, saying that Bukele’s moves were consistent with the flexibility of the program. If the IMF does not enforce the EFF’s restrictions, it cannot address the very structural risks that fueled El Salvador’s need for a bailout.
El Salvador’s cryptocurrency gambit also poses risks to small investors who might be lured into untrustworthy assets. In Argentina, for example, investors lost some $250 million after being encouraged by President Javier Milei to purchase a little-known digital currency called $Libra. When they did so as $Libra went live, those with initial holdings quickly dumped their assets in a classic “rug pull,” leaving small investors lured by the scheme without their money. While bitcoin is too large to be rug pulled, the direction of El Salvador’s cryptocurrency culture may leave Salvadorans uniquely exposed to other digital currencies that take advantage of unsuspecting enthusiasts.
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Cryptocurrency’s New Safe Haven
The IMF also risks granting cryptocurrency companies outsized and opaque political influence in El Salvador. Both Tether (a stablecoin backed by USD assets) and Bitfinex Derivatives (a cryptocurrency exchange) have announced that they are moving their headquarters to El Salvador in recent months.
Tether’s move to El Salvador makes it the country’s biggest company. It claims to hold $143 billion in assets, which as James Bosworth points out, is more than El Salvador’s GDP and over twenty-five times its foreign exchange reserves. Tether’s relocation is also interesting because El Salvador is a higher tax jurisdiction than its previous headquarters, the British Virgin Islands, and brings substantial political risk. In 2021, Tether reached a $41 million settlement with the Commodity Futures Trading Commission (CFTC) for misleading consumers about the extent to which its stablecoin was fully backed by USD assets. Tether also faces a 2024 investigation over its alleged violation of anti-money laundering rules and economic sanctions. This all begs the question of whether Tether’s move to El Salvador might shape the country’s cryptocurrency regulatory regime in a manner favorable for Tether and unfavorable for Salvadorans.
Bitfinex Derivatives has also faced regulatory challenges. In a striking parallel to Sam Bankman-Fried’s FTX crypto exchange, Bitfinex misled clients by claiming solvency while simultaneously begging a company called Crypto Capital Corp to return almost $1 billion in assets that Bitfinex had lost. That led Bitfinex and Tether to reach an agreement with New York Attorney General Letitia James, which included a provision banning them from operating in the State of New York.
There are also questions about how major foreign investments associated with El Salvador’s utopic bitcoin project are displacing Salvadorans while funneling money to wealthy investors in El Salvador and overseas. Salvadorans have been evicted for plans to construct airports, trains, or the infamous “Bitcoin City.” None of those projects have come to fruition.
Taking on a Bold Bukele
Bukele may well feel he can stand up to the IMF, backed by a Trump administration relying on its alliances with Latin America’s strongmen in general and Bukele in particular. If the IMF allows Bukele to continue his stand, it risks allowing El Salvador to set up an opaque regulatory regime. This system would bring the worst of cryptocurrency’s excesses to El Salvador, including money laundering, opaque asset-backing, and the ability to reward regime insiders.
Instead of being “flexible,” the IMF should hold El Salvador to its commitments. It should refuse to unlock upper funding tranches in the EFF if Bukele does not unwind government participation in cryptocurrency, halt government purchases of bitcoin, identify government holdings in the Chivo e-wallet, and meaningfully regulate enterprises like Tether and Bitfinex.
If the IMF takes a harder line, it could enable Bukele to establish cryptocurrency regulations that might benefit Salvadorans and bring more transparency to a murky system. If it fails to challenge Bukele’s overt skirting of IMF rules, it risks not only El Salvador but its own credibility and capability to hold countries—like Argentina, which inked a $20 billion bailout in April—to their commitments.
Samuel Johnson-Saeger is the intern for Latin America Studies and Geoeconomics.