El Salvador Gives In to the IMF: Approves Salvadoran Bitcoin Law Reform to Secure Loan

by | Jan 31, 2025 | FDI Latin America

El Salvador Yields to IMF for a USD 1.4 Billion Deal

El Salvador’s legislators hurriedly approved a reform to the Bitcoin Law to meet the conditions of a multi-billion-dollar agreement with the International Monetary Fund (IMF). The decision marks a significant shift in the country’s Bitcoin policy, initially implemented in 2021 under the leadership of President Nayib Bukele. The reform makes Bitcoin acceptance voluntary and removes its designation as legal tender, reflecting the government’s need to comply with the IMF’s financial requirements.

Legislative Approval of the Salvadoran Bitcoin Law Reform

On Wednesday, El Salvador’s Legislative Assembly approved a bill introduced by President Bukele to amend its Bitcoin Law. The bill was sent to the legislative body, dominated by Bukele’s New Ideas Party, just minutes before being voted on. Despite the lack of prior debate, the bill was swiftly approved with 55 votes in favor and only two against. This move demonstrates the administration’s urgency in securing financial assistance from the IMF.

The Salvadoran Bitcoin law reform modifies key provisions of the 2021 legislation that had made Bitcoin a mandatory payment method for businesses. The revised version eliminates the obligation for businesses to accept Bitcoin, allowing them to decide whether they want to transact in the cryptocurrency. Furthermore, the reform restricts the exchange of digital assets to businesses and citizens, removing the state’s role in its use. This shift aligns with the IMF’s longstanding skepticism toward Bitcoin and digital currencies.

Scaling Back El Salvador’s Bitcoin Policy

In June 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. The move was intended to boost financial inclusion, drive innovation, and attract foreign investment. However, more than three years later, the nation has scaled back its policy to meet the IMF’s conditions for a much-needed financial assistance package.

The IMF had repeatedly warned about the risks associated with Bitcoin, citing concerns over financial stability, regulatory oversight, and the potential for illicit economic activities. As part of the agreement, El Salvador was required to modify its Bitcoin-related policies, leading to the approval of the latest Salvadoran Bitcoin law reform.

IMF Loan Agreement and International Financial Assistance

Last month, El Salvador reached a preliminary deal with the IMF that includes a USD 1.4 billion loan to support the country’s reform agenda and address its balance of payments. The agreement is expected to unlock an estimated USD 3.5 billion in additional funding from the World Bank and the Inter-American Development Bank over the coming years.

The IMF’s requirements included limiting several Bitcoin-related activities to establish the financial support package. One of the most significant changes required under the agreement was making Bitcoin acceptance voluntary, a stark contrast to the original law, which had mandated businesses to accept cryptocurrency as a form of payment.

Changes to Bitcoin’s Legal Status in El Salvador

The reform addresses Articles 1 and 7 of the Bitcoin Law. The original Article 7 stated, “All economic agents must accept Bitcoin as payment when offered by the purchaser of a good or service.” The revised version allows businesses to decide whether to accept Bitcoin, making its use optional.

Additionally, Article 1 has been reworded to specify that Bitcoin transactions must be conducted “with voluntary acceptance by natural or legal persons, exclusively within the private sector.” This change eliminates any obligation for public institutions to engage in Bitcoin transactions, reinforcing the government’s pivot away from its initial pro-crypto stance.

Other repealed provisions include articles that previously permitted taxes to be paid with Bitcoin and mandated the state to provide mechanisms for Bitcoin transactions. These mechanisms included automatic and instant Bitcoin-to-U.S. dollar conversion to reduce volatility risks for businesses and individuals.

Implications for El Salvador’s Bitcoin Ecosystem

Stacy Herbert, director of El Salvador’s National Bitcoin Office, stated that Bitcoin will remain legal tender but will be limited to private-sector investments. This clarification underscores that the government is not entirely abandoning its Bitcoin experiment but is instead shifting the focus away from state-mandated adoption.

Furthermore, Herbert revealed that the government’s Chivo Wallet, introduced to facilitate Bitcoin transactions among Salvadorans, will either be “sold” or “discontinued.” The Chivo Wallet was initially promoted to facilitate Bitcoin transactions, particularly for remittances. However, its widespread adoption faced technical glitches and security concerns. The discontinuation or privatization of Chivo Wallet signals the government’s further retreat from its role in Bitcoin adoption.

IMF’s Skepticism and Bitcoin’s Future in El Salvador

The IMF has consistently expressed doubts about Bitcoin’s viability as a national currency. It has issued multiple warnings to El Salvador regarding the risks associated with cryptocurrency adoption, including financial instability and regulatory uncertainties. With the approval of the Salvadoran Bitcoin law reform, the government has demonstrated its willingness to compromise on its initial vision in exchange for international financial support.

While Bitcoin remains legal in El Salvador, its economic role has been significantly reduced. The new legislation departs from the bold ambitions that initially positioned El Salvador as a pioneer in cryptocurrency adoption. Moving forward, the success of Bitcoin in the country will largely depend on voluntary adoption within the private sector rather than government-mandated use.

Conclusion: A Pragmatic Shift in Policy

The approval of the Salvadoran Bitcoin law reform reflects El Salvador’s pragmatic approach to securing financial stability. While the country initially embraced Bitcoin as a revolutionary financial tool, economic realities and the need for external funding have forced a policy shift. The government’s willingness to amend its Bitcoin Law to align with IMF requirements highlights the delicate balance between financial innovation and economic stability.

As El Salvador moves forward with its IMF-backed reforms, the role of Bitcoin in the nation’s economy will continue to evolve. Whether Bitcoin adoption will thrive in the private sector or diminish over time remains to be seen. However, one thing is clear: El Salvador’s experiment with cryptocurrency has entered a new phase, prioritizing financial pragmatism over ideological commitment.