Failure or 5D chess? El Salvador IMF deal walks back Bitcoin adoption

El Salvador has rescinded Bitcoin’s status as a full legal tender in order to close a deal with the International Monetary Fund (IMF), leaving Bitcoin (BTC) advocates split over what this means for adoption in the country.

The changes came amid tense negotiations with the IMF in which El Salvador sought to secure a $1.4 billion loan “to address balance of payment needs and support the government’s economic reforms.” Once combined with “additional financial support from the World Bank, the Inter-American Development Bank, and other regional development banks,” the total sum will amount to $3.5 billion — a critical level of funding for the small Central American nation. 

The IMF deal required El Salvador to:

• Make accepting Bitcoin voluntary for the private sector;

• “Confine” public sector participation in Bitcoin; and

• Privatize the Chivo wallet. 

There have been various reactions among observers to Bukele’s willingness to “bend the knee.” Some claim this is just a temporary setback and part of a broader strategy to push Bitcoin adoption in the country, while others say adoption barely had a shot to begin with.

Some Bitcoiners are unfazed by El Salvador’s IMF deal

Bitcoiners often criticize the IMF for strict loan conditions that, in their eyes, hamper economic growth. The deal on Jan. 29 left many of them decidedly gloomy about the state of BTC adoption.

But not all Bitcoiners are convinced that Bukule capitulated; rather, they feel the deal was another clever chess move.

Crypto influencer Lina Seiche believes the loan is “a confidence boost for investors—on the traditional markets, the IMF deal holds a lot of weight. This means more fundraising opportunities to tackle El Salvador’s economy.”

One observer suggested that El Salvador could simply wait until the terms of the loan expire, and then reinstate the law.

Bitcoin maxi approach curbed investment, critic says

Monica Taher, former technological director at the Secretariat of Commerce and Investment of El Salvador, contends that the changes to the Bitcoin law were a long time coming and were the result of government policy failures on multiple fronts.

“From the start, the Salvadoran government failed to implement any educational strategy for its population,” Taher told Cointelegraph.

“If the goal was to provide financial freedom to the average citizen, the government should have prioritized education. That never happened.”

Foreign investment, the very thing Bitcoin was supposed to bring in spades, also suffered, according to Taher.

“The maximalist approach in El Salvador became toxic, driving several companies and investors away. We also saw that many hardcore maximalists were primarily seeking personal gain — some even purchased buildings in downtown San Salvador with zero taxes. It is clear to me that their intention was never to educate or empower Salvadorans.”

Related: Bitcoin reserves interest gains momentum across 5 continents

Economic policies weren’t the only factor behind the lack of investment, Taher said, pointing to Bukele’s questionable human rights record and his drive to solidify his role as the “world’s coolest dictator” for the foreseeable future.

Taher added, “In 2024, El Salvador received the lowest amount of foreign investment in all of Central America. This was due to the erosion of the rule of law, lack of transparency and lack of accountability.”

“President Bukele’s party-controlled Congress recently approved a controversial law that could allow him to be reelected indefinitely, similar to [Venezuelan President] Nicolas Maduro or [Nicaraguan President] Daniel Ortega. This, combined with the state of exception — where over 350 innocent people have died after being arrested and charged without the opportunity to prove their innocence — makes it very difficult for any investor to place their money in El Salvador.”

“Do not mourn,” Bitcoin maxis

With the ink of the amendment barely dry, Bitcoin advocates in the country are already thinking about what to do next.

John Dennehy, the founder of Bitcoin education organization My First Bitcoin, called on fellow Bitcoiners to take up the gauntlet and continue with adoption efforts: “Grassroots adoption & organizations here just got a whole lot more important. They will need your support now more than ever. Waste no time in mourning; organize.”

Jordan Urbs, a Bitcoin proponent and “sovereignpeneur” based in El Salvador, believes Bitcoin adoption in the country will continue apace, albeit driven by grassroots organizing.

Urbs — and many other foreign Bitcoin entrepreneurs in the country — cites the low crime rate and the ease with which one can set up a business and establish residency as key factors driving a “Renaissance culture” in the country. 

“Thanks to ‘Bitcoin tourism,’ a growing force of decentralized & sovereignty-minded innovation has gravitated to El Salvador, which many are coining the ‘Renaissance 2.0.’” Urbs wrote.

However, Taher doesn’t think Bitcoin adoption is likely to improve. “El Salvador’s Bitcoin ecosystem will be relegated to companies and foreigners who relocated to the country. I dare say that 99% of the population doesn’t use Bitcoin, and its adoption will decline even further.”

Indeed, early studies and predictions about BTC in the country centered heavily around remittances — a crucial part of the Salvadoran economy. PwC published a report in 2021 citing the significant potential for Bitcoin, enabled by the government-run wallet Chivo, to improve remittance efficiency and lower costs for recipients. 

But according to data from the Central Reserve Bank of El Salvador, crypto remittances spiked, then fell drastically after 2021, barely breaking 1% of total remittances in 2024.

Magazine: Pectra hard fork explained — Will it get Ethereum back on track?