Bitcoin-as-Currency Experiment Costs El Salvador 1% of Its GDP, IMF Reports

The International Monetary Fund (IMF) is still on the offensive when it comes to El Salvador’s use of bitcoin as a legal tender, estimating the cost of implementing the program at 1% of the country’s gross domestic product (GDP). And that’s not counting the cost of the 1,801 bitcoins purchased by President Nayib Bukele.

As a result, “the actual costs of implementing Chivo and making the Bitcoin Law operational outweigh the potential benefits,” the IMF said in athe annual Article IV consultation/review of El Salvador’s finances released last week, according to La Prensa Grafica. “If the use of bitcoin increases significantly, it can jeopardize the dollarization regime that has proven to be a successful nominal anchor for the economy.”

However, the IMF actually supports the Chivo digital wallet El Salvador built to make bitcoin payments feasible. The IMF’s chief of mission for El Salvador, Alina Carare, said she just wants to have Chivo “become a self-financing company, end the subsidy for new users and liquidate the Bitcoin Trust (FIDEBITCOIN), returning unused funds to the Treasury,” the paper noted.

In addition to reiterating the IMF’s warning about the financial risks of using bitcoin as legal tender, Manuel Orozco, director of Migration, Remittances and Development of the Inter-American Dialogue organization, noted that the country’s financial system had not actually become “coupled to bitcoin because there is no demand for the currency,” the Los Angeles Times reported.

He added that bitcoinization also adds to fiscal risk because the cost of the program is not offset by the generation of more transactions for the local economy.

The right-wing opposition Nationalist Republican Alliance (Arena) party introduced a bill Jan. 27 to repeal the enabling Bitcoin Law, as well as approve the $150 million trust fund supporting it, said La Prensa Grafica.

Arena MP Ricardo Godoy said “it would seem that the only thing that matters in this country is speculating with bitcoin,” according to the article. “…Salvadorans have many needs and they are not being taken care of by the State … all Salvadorans have the freedom to be able to occupy bitcoin without having as a law that it be legal tender and that its acceptance must be mandatory.”

The Bitcoin Law did hold up in court, as tax magistrates from the country’s Constitutional Chamber of the Supreme Court of Justice, rejected an appeal that argued the extremely short process of passing the law was unconstitutional, according to the news outlet El Salvador. Parliament “only had five hours to discuss a law that structurally modifies the monetary policy of El Salvador … without summoning individuals, social groups and organizations of society to the commissions or the plenary session to present points of view [about] specific proposals that require legislative activity,” the suit stated.

Repairing Chivo

The Salvadoran government is working with U.S. cybersecurity firm AlphaPoint to fix the Chivo Wallet’s security flaws, which have led to more than 1,200 people having their wallets hacked and the $30 in bitcoin deposited in them stolen, as well as 11,000 complaints to the Consumer Protection Office last year.

Meanwhile, the government announced plans to install 1,500 bitcoin ATMs around the country to serve the population’s needs, according to Up To Brain.

The government’s release “shows that Chivo is planning to expand its current consumer-faced use cases to other day-to-day transactions like taxes, payments of home utilities, and many other daily transactions in bitcoin,” the news outlet said.

One of those is the city of Ilopango, which announced plans to collect municipal taxes in bitcoin via the Chivo Wallet, in hopes of increasing tax collections overall, according to news outlet Be In Crypto.