Thread by @danielmunevar

Another 🧵 on El Salvador (SLV): #bitcoin as an international reserve asset, Balance of Payments (BoP), and the IMF edition.

Some thoughts on the risks posed by the introduction of BTC as legal tender in SLV for the country in the context of an IMF program.

On the surface, it appears that BTC does not have an impact on the BoP position of the country. BTC is not going to increase remittances, change demand for SLV exports from Rest of the World (RoW), nor change SLV imports from RoW.

Introduction of BTC is not going to magically increase the profitability of domestic firms. Capital flows, either portfolio or FDI, should by extension remain broadly the same (lets abstract for a second from the thorny issue of AML skirting investments).

The issue for el SLV is that years of running Current Account (CA) and Fiscal deficits have created a substantial debt problem. The country needs to attract USD to repay its debt and stabilize its foreign reserves. That is why is negotiating a program with the IMF.

Why then should the IMF care about SLV adopting BTC, if this does not impact the BoP position of the country? The thing is that it does through the backdoor and here is where things gets interesting.

SLV has committed to exchange BTC for USD through a mechanism housed at the Banco de Desarrollo del Salvador (BANDESAL). As explained in a previous thread, most of the BTC inflows are likely to be promptly exchanged into USD.

Unlike the USD, BTC is not considered an international reserve asset. Thus, from a BoP perspective, every time a BTC is exchanged for a USD by BANDESAL, this represents a reduction of the international reserves of SLV. From an accounting perspective, is a capital outflow.

Thus, an open ended commitment to exchange BTC for USD goes directly against one of the goals of an IMF program (BoP stabilization). And again, the BTC/USD exchange commitment is key to ensure the adoption of BTC.

Faced with this problem, SLV can commit to sell their BTC holdings on a regular basis to replenish their USD reserves. However, this exposes the country to a Ponzi like structure of financing.

If BTC price goes up, the return on BTC holdings is the equivalent of a profit in a foreign investment (BoP). This can be booked as a net increase in the reserve position and an income to BANDESAL and the government. Fiscal and BoP problems are both magically solved.

However, if the BTC price goes down, the logic applies in reverse. BTC holdings will have both a negative fiscal and BoP impact. Only way to meet USD redemptions would be accelerate the rate of liquidation of BTC.

In this context, the only way to meet acceleration of redemptions is to attract new BTC inflows. However, this only makes the problem worse as it further increases the exposure of SLV to BTC. The definition of a ponzi scheme.

Even leaving all of this aside, I think is unlikely that the IMF will be willing to roll the dice with a program in which it's money is used to bankroll a Ponzi scheme. Time will tell. END.