Bitcoin couldn’t be all glitter and gold for El Salvador

“We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes,” an email from the World Bank spokesman stated.

The World Bank announced on Wednesday that, given environmental and accessibility concerns, it could not support El Salvador’s Bitcoin deployment.

“While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.”

The Salvadoran finance minister Alejandro Zelaya announced earlier Wednesday that they had requested the Bank’s technical support as it wanted to utilize Bitcoin as parallel legal money in tandem with the US currency.

The Minister also claimed that the discussions on progress with the International Monetary Fund were fruitful, but last week the Fund stated it regarded the country’s acceptance of Bitcoin as ‘macro-economic, financial and legal issues.’

El Salvador’s Finance Minister Alejandro Zelaya speaks during a news conference in San Salvador, El Salvador June 16, 2021. REUTERS/Jose Cabezas

Zelaya claimed the IMF was “not against” the adoption of Bitcoin on Wednesday. A request for comments was not answered by the IMF.

In the context of increasing worries over the conclusion of the IMF transaction, investors have called for more premiums for holding El Salvadoran debts, which are crucial to fixing budget loopholes by 2023.

Siobhan Morden, head of Amherst Pierpont Securities’ Latin America Fixed Revenue Strategy New York, said:

“There is no fast track for a solution on an IMF program and even uncertainty on whether the bitcoin proposal is compatible with diplomatic U.S. (or) multilateral relations,”

However, El Salvador became the first country this month to take Bitcoin as a legal tender, with President Nayib Bukele taking over the prospect of cryptocurrency as a money-back to Salvadorans overseas.

This month, Bukele also pulled the United States government’s anti-corruption agreement to end corruption in Central America, as a part of its immigration laws. The United States government was frightened by this agreement.

“The recognition of a ‘Bukele’ risk premium has probably done some permanent damage to investor sentiment,” Morden stated in her client’s letter.

But according to Shamaila Khan, head of the Alliance Bernstein EM debt strategy in New York, the market may focus too much on the news headlines and not sufficiently on the potential of an agreement with the IMF.

She asserted “It is important for El Salvador to get the IMF program done. If it was lost on them, they wouldn’t have the conversations,”

“Our view is, too much risk is priced in at these levels.”

El Salvador had embraced the US currency as a road to future development twenty years ago, but the results were dismal. Given the importance of non-currency concerns like corruption and governance, Bitcoinization may follow suit — with the extra complication of being yet another foreign factor over which Salvadorans have no control. However, Bukele appears to believe that his new laser-eyed companions are a ticket to more fortune.