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El Salvador has reached a new loan agreement with the International Monetary Fund (IMF) that will see the central American nation cut back its efforts to promote Bitcoin as a method of payment.
On Wednesday (December 18), the IMF announced a new staff-level agreement with the government of El Salvador on an Extended Fund Facility (EFF) arrangement.
The agreement will unlock $1.4bn in IMF loans over 40 months, to address the country’s balance of payment needs and support the government’s economic reforms.
However, the loans will not come without strings attached, and one of the IMF’s key conditions is that the government must reverse many of its key Bitcoin policies.
Under the agreement, El Salvador is expected to introduce legal reforms that will make acceptance of Bitcoin payments by the private sector voluntary.
In June 2021, El Salvador became the first country in the world to make Bitcoin legal tender, when it enacted legislation known as the Bitcoin Law.
Unlike the legal tenders laws of other jurisdictions, such as the UK, El Salvador’s Bitcoin Law forced merchants to accept Bitcoin payments if the consumer opted to pay in Bitcoin.
As Article 7 of the law states: “Every economic agent must accept Bitcoin as a form of payment when it is offered to him by whoever acquires a good or service.”
Speaking to Vixio, an IMF spokesperson said the Bitcoin Law does not need to be revoked in full as part of the loan agreement, but the provisions that compel the private sector to transact in Bitcoin will need to be amended.
Government support for Bitcoin app must end
The passing of the Bitcoin Law helped the government to promote the use of Chivo, its proprietary Bitcoin wallet. (In El Salvador, “chivo” is slang for “cool”.)
Under the terms of the IMF agreement, the government must gradually wind-down its support for Chivo, most likely by selling it to a private enterprise.
In September 2021, when Chivo was launched, every El Salvador citizen who created an account received a $30 sign-up bonus.
This led to the app being downloaded more than 4m times — meaning that 60 percent of El Salvador’s 6.3m people created an account.
However, after receiving their $30 sign-up bonus, only four in ten El Salvadorans continued to use the wallet to transact.
For the government, the biggest disappointment was Chivo’s failure to break into the remittance market — a use case that was heavily promoted by President Nayib Bukele.
Between September 2021 and April 2022, according to the central bank, Bitcoin was used in 1.9 percent of remittances sent to El Salvador. (In 2021, remittance income made up a record 25 percent of El Salvador’s GDP.)
In the first seven months of 2024, crypto-based remittances sent to El Salvador fell to 1.04 percent of the total, a 5 percent drop compared with the same period in 2023.
In the years since Chivo’s launch, subsequent data suggests that Bitcoin has also failed to gain traction as a retail payment method.
In October 2024, a team at El Salvador’s Francisco Gavidia University surveyed 1,200 citizens on a range of economic and financial issues.
Asked whether they have “used Bitcoin to make a transaction”, 92 percent of respondents said “no”.
El Salvador’s Bitcoin portfolio to be capped
Also in September 2021, El Salvador became the first country in the world to invest in Bitcoin using public funds.
Over the following year, the price of Bitcoin dropped almost 50 percent, leaving the government with unrealised losses of around $70m.
In 2023, the price began to reverse, and in 2024, it has repeatedly hit new all-time highs — a relief for the country’s Bitcoin Office, whose total Bitcoin holdings are now worth more than $600m.
According to the Nayib Bukele Portfolio Tracker, the government is now up 126 percent on its Bitcoin investments overall, amounting to an unrealised profit of $180m.
However, under its new agreement with the IMF, the government will be forced to “confine” its engagement in “Bitcoin-related economic activities”, "transactions" and “purchases”.
Speaking to Vixio, an IMF spokesperson confirmed that El Salvador cannot use public money to make new purchases of Bitcoin once the loan agreement comes into effect.
This could take some time, however, given that the loan agreement first has to be approved by the IMF’s executive board, which will not take place until February 2025 at the earliest.
This helps to explain why, following the IMF’s announcement of the agreement, El Salvador’s Bitcoin Office posted on X that it will “keep stacking 1 BTC per day, every day”.
The IMF also told Vixio that, once the loan agreement is in effect, El Salvador will be under no obligation to liquidate any of its current Bitcoin holdings.
The conditions imposed by the agreement will “significantly diminish” the risks posed by the government’s previous Bitcoin policies and investments, said the IMF.
Finally, the government must commit to accepting tax payments only in US dollars.
At present, as per Article 5 of the Bitcoin Law, “all” taxes may be paid in Bitcoin. Tax payments are also one of the features of the Chivo wallet.
