EL SALVADOR: World Bank holds back assistance on Bitcoin integration

EL SALVADOR’S plan to integrate Bitcoin into its society has suffered hindrance as the World Bank has refused rendering assistance, stating environmental and transparency concerns as its reasons.

According to a report by Reuters, a spokesperson for the world’s apex bank stated via email that, “We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes. 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 had recently the country had sought technical assistance from the Bank as it seeks to use bitcoin as a parallel legal tender alongside the U.S. dollar.

Zelaya had also said ongoing negotiations with the International Monetary Fund (IMF) had been successful, even when the IMF said last week it saw “macroeconomic, financial and legal issues” with the country’s adoption of bitcoin. Although Alejandro Zelaya made it clear yesterday that the IMF was “not against” the bitcoin implementation.

Investors have recently started demanding higher premiums to hold Salvadoran debt because of concerns over the completion of the IMF deal which is key to patching budget gaps through 2023. Bonds sold off across the curve, with the 2032 issue down more than 2 cents at 96.25 cents on the dollar. The spread of Salvadoran debt to U.S. Treasuries dipped to 705 basis points after hitting on Tuesday a four-month high of 725 bps.

Head of Latin America fixed-income strategy at Amherst Pierpont Securities in New York, Siobhan Morden, stated that “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.”

It can be recalled that El Salvador became the first country to accept bitcoin as legal tender with President Nayib Bukele pushing the idea that cryptocurrencies have potential as a remittance currency for Salvadorans overseas.

Bukele had also stated that 70% of the El Salvadoran population do not have bank accounts and Bitcoin as a legal tender helps to facilitate banking the unbanked.

He also pulled out of an anti-corruption accord with the Organization of American States, which setback the U.S. government, as the country looks to fight corruption in Central America as part of its immigration policy.

Siobhan Morden made comments on the recent decisions of the President of El Salvador in her client note stating, “The recognition of a ‘Bukele’ risk premium has probably done some permanent damage to investor sentiment”.

Head of EM debt strategies at AllianceBernstein in New York, Shamaila Khan, explained that the market may be focusing too much on the news headlines and not enough on the possibility of a deal with the IMF.

“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,” she said.

Bitcoin fell by 2.30% on Thursday, as it is currently below $40,000 after it recently crossed to trade at $39,300.