Katherine Ross

International Monetary Fund’s managing director Kristalina Georgieva focused on the benefits of central bank digital currencies (CBDCs) in a speech Wednesday.



Speaking at the Singapore Fintech Festival, Georgieva asked policymakers to continue introducing and possibly embracing CBDCs. Her speech echoed a similar one from Christine Lagarde — her predecessor — made five years ago.



“The public sector should keep preparing to deploy <a href="https://blockworks.co/tag/cbdc">CBDCs</a> and related payment platforms in the future,” Georgieva said.



She warned that the world continues to move forward at breakneck speeds with new technologies, citing ChatGPT’s two months to reach 100 million users — something that generally takes applications roughly three years.



Countries, Georgieva added, “should remain open to potentially deploy CBDCs tomorrow.”



Various countries — including the US — are currently exploring or <a href="https://blockworks.co/news/hong-kong-cbdc-pilot">looking into a possible CBDC</a>. However, many have said that they’re a ways off even if central banks choose to push forward.&nbsp;



Read more: <a href="https://blockworks.co/news/federal-reserve-cbdc-stablecoins">Fed continues to explore ‘CBDC payments backbone:’ Barr</a>



In August, <a href="https://blockworks.co/news/canada-obstacles-to-cbdc">Canada’s central bank admitted</a> that “significant” barriers remain before it can implement a CBDC.



A Bank of International Settlements survey in July found that there’s <a href="https://blockworks.co/news/banks-exploring-potential-cbdc">high demand for the exploration of CBDCs</a>, with 94% of banks surveyed admitting interest.



“CBDCs can replace cash which is costly to distribute in island economies. They can offer resilience in more advanced economies. And they can improve financial inclusion where few hold bank accounts,” Georgieva said. She noted that 60% of countries are exploring a CBDC.



She pushed central banks interested in CBDCs to “think a little more like entrepreneurs. Communication strategies, and incentives for distribution, integration, and adoption, are as important as design considerations.”



One of the most important factors when exploring a CBDC is the ability for CBDCs to facilitate cross-border payments. The general manager of the Bank of International Settlements, Agustin Carstens, <a href="https://blockworks.co/news/bis-cbdc-legal-framework-monetary-system">echoed a similar sentiment</a> in late September.&nbsp;



“But we may be at a point where the public sector needs to offer a little more guidance. Not to crowd out, not to disrupt. But to act as a catalyst, to ensure safety and efficiency — and to counter fragmentation,” she said.



The IMF also announced a CBDC <a href="https://www.imf.org/en/Topics/fintech/central-bank-digital-currency/virtual-handbook">handbook</a> essentially explaining different steps to start exploring a CBDC.



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CBDCs can ‘replace cash,’ IMF says

James Cirrone

The International Monetary Fund (IMF) published a short piece Thursday discussing how Latin American and Caribbean countries have adopted cryptocurrencies and CBDCs at a breakneck pace compared to the rest of the world, citing Chainalysis <a href="https://blog.chainalysis.com/reports/2022-global-crypto-adoption-index/">data</a>.&nbsp;



The main <a href="https://www.imf.org/en/News/Articles/2023/06/22/cf-interest-in-cb-digital-currencies-picks-up-in-latam-the-caribbean-while-crypto-use-varies">takeaways</a> from the IMF’s economists?



Well-designed CBDCs would simplify remittances and include more Latin American and Caribbean citizens in the financial system. But crypto as a whole is risky and needs to be regulated. 



The IMF highlighted the fact that CBDCs in Caribbean countries have been plagued by “slow take-up and disruptions in access” which could be solved by “investing in public awareness and robust infrastructure” to promote adoption.&nbsp;



Kenya’s central bank also <a href="https://blockworks.co/news/cbdc-kenya-central-bank">pointed to the challenges other nations have faced</a> while attempting to launch a CBDC program in early June, opting to wait and see.&nbsp;



As for the topic of properly regulating crypto, the IMF singled out Latin America and the Caribbean because it says these regions have “a history of macroeconomic instability, low institutional credibility, substantial capital flows, corruption, and extensive informal sectors.”



Its number one concern appears to be countries elevating crypto to the status of legal tender, something <a href="https://blockworks.co/news/el-salvador-went-all-in-on-bitcoin-will-other-countries-follow">El Salvador did with bitcoin in June 2021</a>. Back in 2022, the IMF <a href="https://blockworks.co/news/imf-asks-el-salvador-to-remove-bitcoins-legal-tender-status">pressed the country to remove bitcoin</a> as a government-sanctioned currency, citing “large risks” associated with consumer protections.



In its Thursday article, the IMF reiterated what it laid out in its February 2023 <a href="https://www.imf.org/en/Publications/Policy-Papers/Issues/2023/02/23/Elements-of-Effective-Policies-for-Crypto-Assets-530092">guidelines</a> for regulating digital assets. It pointed to the fact that crypto is inherently volatile and could shake the foundations of a country’s monetary system if there are big price swings.&nbsp;



This is certainly something that El Salvador — which <a href="https://blockworks.co/news/el-salvadors-reserves-tumble-as-bitcoin-extends-losses">kept adding bitcoin to its coffers</a> after it was made legal tender — confronted throughout 2022, when bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) shed <a href="https://blockworks.co/news/crypto-stocks-tanked-2022">nearly 60% of its value</a>. It’s important to note that El Salvador subsequently was <a href="https://blockworks.co/news/el-salvador-makes-good-on-800m-debt-despite-bitcoin-bet">still able to pay off an $800 million external bond</a> in early 2023.



Even though the IMF’s view on bringing bitcoin up to parity with government-issued currency is quite well established at this point, it pushed back on countries that have opted to restrict crypto, <a href="https://blockworks.co/news/argentinas-central-bank-bans-crypto-trading-in-traditional-banks">namely Argentina</a> and the Dominican Republic.



“This approach may not be effective in the long run. The region should instead focus on addressing the drivers of crypto demand, including citizens’ unmet digital payment needs,” IMF staff wrote. 



This shouldn’t be mistaken for the IMF supporting crypto. In fact, it said in February that “crypto assets have been more of a disappointment than a revolution for many users.” It also argued that <a href="https://blockworks.co/news/imf-blockchain-good-crypto-disappoints">private blockchains are preferable to public blockchains</a> like Ethereum.



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IMF lukewarm on crypto, notably receptive to CBDCs

Shalini Nagarajan

Tobias Adrian, a financial counselor at the International Monetary Fund (IMF), recently discussed ways to revolutionize money with the global equivalent of a central bank digital currency (CBDC) system.



In a speech at a roundtable on CBDCs this week, Adrian explored the underlying infrastructure of money and shared a blueprint for enhancing cross-border and domestic payments, saying it could usher in a new era of financial transactions.



He discussed the difficulties cross-border payments face, including high costs, slow processing and need for more transparency. Adrian noted the IMF, World Bank, Bank of International Settlements and the Financial Stability Board have been working together on this issue.



A potential solution would involve a trusted ledger to provide a secure and reliable electronic system where property rights can be recorded.



“Expressed in today’s language, the vision is for a trusted ledger, which is essentially an electronic document representing property rights on which digital versions of central bank reserves in any currency can be traded among participants,” he <a href="https://www.imf.org/en/News/Articles/2023/06/19/sp061923-exploring-cross-border-and-domestic-payment-and-contracting-platforms" target="_blank" rel="noreferrer noopener">said</a>.



Adrian then broke down a platform concept called &#8220;XC&#8221; for cross-border payments and contracting, which consists of three main layers: settlement, programming financial contracts and managing information.



The idea would be to promote seamless money settlement across multiple fiat currencies on a single system.&nbsp;



<h2 class="wp-block-heading">Multicurrency system without a new settlement token</h2>



The IMF suggests developing distinct and standardized digital representations for fiat currencies, allowing for interchangeability.



Under the vision, XC platforms would facilitate multicurrency transactions without introducing a new settlement asset. Cryptocurrencies including XRP have been pitched as such a middleware cryptocurrency. 



The IMF’s XC platforms would instead allow users to freely select the currencies involved, while central banks maintain control over reserve allocation.



Through programming, contracts can be automated (as is the case with <a href="https://blockworks.co/news/eu-passes-smart-contracts-policy" target="_blank" rel="noreferrer noopener">smart contracts</a>), allowing for simultaneous currency swaps based on specific price conditions. This eliminates the need for parties to disclose sensitive information to a market maker when submitting their orders.



In terms of information management, XC platforms separate settlement and non-settlement services, including compliance checks. This ensures a clear division of responsibilities. Countries retain control over limits on foreign currency holdings and transactions, as well as compliance checks.



<h2 class="wp-block-heading">Domestic CBDC systems could plug into global ledger</h2>



He pointed out that XC platforms have a broader application beyond cross-border payments and can also benefit domestic financial systems.&nbsp;



To address this, he suggested the creation of domestic equivalents of the XC platforms, powered by individual CBDCs.



“A CBDC platform would be designed much in the same way as an XC platform. Its single ledger would be compatible with those of private firms,” he said.



He pointed out that more work needs to be done to test the technology and establish the necessary legal and governance frameworks.



CBDC systems vary in implementation and technological underpinnings, but they mostly run on private blockchains controlled by government institutions. This is opposed to the permissionless decentralized networks on which major cryptocurrencies like bitcoin and ether have been deployed.



The IMF has <a href="https://blockworks.co/news/imf-blockchain-good-crypto-disappoints" target="_blank" rel="noreferrer noopener">previously suggested</a> that private blockchain networks can make payments and settlements faster and more secure.



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IMF advisor sees power in global ledger that works with CBDCs

Ben Strack

Central bank digital currencies, also called CBDCs, are the future, according to a leader at the International Monetary Fund, but certain types could pose threats that are thus far unknown.  



During a Monday discussion at the Milken Institute Global Conference, Kristalina Georgieva, a managing director at the global organization, stated that the IMF can no longer overlook digital versions of countries’ fiat currencies.



“We actually rapidly increased our staff that deals with digital money, because we know this is where we are headed; it is not going to be reversed,” Georgieva said. “Before the pandemic we used to say the future is digital, and with the pandemic, the future has arrived.”



<h2 class="wp-block-heading">Wholesale versus retail CBDCs</h2>



Georgieva made a distinction between what she called retail <a href="https://blockworks.co/tag/cbdc" target="_blank" rel="noreferrer noopener">CBDCs</a> — ones that can be held and used by individuals — and wholesale CBDCs, which would be designed only for certain financial institutions.



“We think that wholesale CBDCs can be put in place with fairly little space for undesirable surprises, whereas retail CBDCs completely transform the financial system in a way that we don’t quite know what consequences it could bring,” she explained.&nbsp;



The comments came after an IMF <a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2022/02/07/Behind-the-Scenes-of-Central-Bank-Digital-Currency-512174">report</a> published last year called CBDCs “uncharted territory” that raises both challenges and opportunities. The report noted that information sharing between countries conducting CBDC projects will be critical.



Roughly 110 countries are <a href="https://blockworks.co/news/pwc-more-than-80-of-central-banks-are-considering-launching-a-cbdc">in the midst of studying CBDCs</a> or getting set to implement them, she added. The IMF is engaged in discussions with roughly 50 nations on the topic.&nbsp;



The Central Bank of the Bahamas launched its <a href="https://www.sanddollar.bs/">CBDC</a>, called the Sand Dollar, in 2020. Some have said emerging markets economies generally are <a href="https://blockworks.co/news/why-emerging-markets-are-leading-the-charge-on-cbdcs">more motivated to explore</a> such options — compared to more developed countries — based on different needs.&nbsp;



China also has CBDC pilots across many of the country’s provinces. Government employees in the city of Changshu are reportedly <a href="https://blockworks.co/news/china-cbdc-government-salaries">set to be paid in the country’s digital yuan</a> starting in June.&nbsp;&nbsp;&nbsp;



“I can tell you that we will see a very significant transformation that comes from CBDCs, even in the US, where that was, for quite some time, a topic of not great interest,” Georgieva said. “Now there is an engagement, and for the right reason: the future has arrived.”



<a href="https://blockworks.co/news/bidens-crypto-executive-order-may-be-watershed-moment-despite-lack-of-specifics">An executive order</a> signed by President Biden in March 2022 called for “placing urgency” on the research and development of a US CBDC, though there are currently <a href="https://www.federalreserve.gov/central-bank-digital-currency.htm">no formal plans to launch one</a>.



The Federal Reserve has <a href="https://blockworks.co/news/fed-payments-fednow-launch-july">plans to roll out a real-time payments service</a>, called FedNow, in July. Presidential candidate Robert Kennedy Jr. claimed <a href="https://blockworks.co/news/fed-cbdc-robert-kennedy-fednow">FedNow could be the first step toward a CBDC</a>.



Fed Chair Jerome Powell has said the central bank would seek <a href="https://www.wsj.com/articles/powell-says-congressional-support-likely-needed-to-adopt-fully-digital-dollar-11616424452">approval</a> from Congress and the government before launching any sort of digital currency.



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Retail CBDCs Could Pose Risks Not Yet Known, IMF Head Says

Casey Wagner

<div id="highlights-block_62a3a31b85428" class="highlights">
 <ul>
 <li>IMF report suggests countries, crypto infrastructure providers move away from proof-of-work-based CBDCs</li>
 <li>CBDCs should be better for the environment than existing systems, analysts said</li>
 </ul>
 
</div>



A new study from the International Monetary Fund urges countries looking to develop CBDCs to consider energy consumption when making their design choices.



Central banks should “design CBDCs [central bank digital currencies] with the explicit goal to be environmentally friendly,” the IMF said in the <a href="https://www.imf.org/en/Publications/fintech-notes/Issues/2022/06/07/Digital-Currencies-and-Energy-Consumption-517866" target="_blank" rel="noreferrer noopener">report</a>. The payments system broadly, including central banks’ legacy systems, uses a large amount of energy, and moving toward renewables across the entire financial sector should be the goal, IMF analysts added.&nbsp;



“What we are seeing now is a broader realization that if CBDC is going to be an infrastructure, it has to be better than the one we have,” Carmelle Cadet, CEO of CBDC infrastructure provider EMTECH, said. “In addition to processing payments faster, with easier traceability and trust, CBDC has to be energy efficient.”&nbsp;



“Major cloud service providers are shifting toward renewable sources of energy such as geothermal and hydropower, as well as toward locations with colder climates, to reduce the carbon footprint in generating power,” the report read. “Adding the environmental footprint as a selection criterion of a cloud partner can benefit not only the CBDC project, but also any future digitization project of a central bank.”&nbsp;



The IMF also recommends that countries and crypto companies move away from energy-intensive proof-of-work protocols, a suggestion some say could impact user experience.&nbsp;



“Different protocols focus on various priorities…you have trade-offs that might not align to energy efficiency,” Cadet said.



The report comes as more nations, particularly developing countries, make strides toward launching their own CBDCs, which advocates say can drastically improve the lives of those living in predominantly cash-driven societies.&nbsp;



“Providing a cash-like digital means of payment, in light of reduced cash usage and an increase in private digital payment services, is the most common consideration [for developing a CBDC],” a recent report from the <a href="https://www.bis.org/publ/bppdf/bispap123.htm" target="_blank" rel="noreferrer noopener">Bank for International Settlements</a> said. “Other significant considerations include strengthening competition among payment service providers (PSPs), increasing efficiency and reducing the costs of financial services.”&nbsp;



Jamaica <a href="https://cms.blockworks.co/in-historic-move-jamaica-makes-cbdc-akin-to-cash/" target="_blank" rel="noreferrer noopener">has already approved</a> its upcoming CBDC as legal tender in the nation. Brazil, Nigeria and Haiti are among the jurisdictions exploring the establishment or expansion of CBDCs. The Central Bank of the Bahamas’ Sand Dollar became the world’s first CBDC in 2020.



With environmental, social and governance-focused investing and climate change at the front of many minds, it is not a surprise that the IMF is choosing to focus on how digital assets impact the environment, according to another CBDC expert.&nbsp;



“Central banks are thinking about energy, and they should be thinking about energy,” said Jonathan Dharmapalan, CEO of eCurrency, which provides technology for central banks to issue and distribute CBDCs. “Energy efficiency is not just about how to do this with digital currency, it is also about the lack of energy efficiency and moving physical currency, which is also an issue.”



Correction: An earlier version of this story featured an image of Christine Lagarde, who was the Managing Director of the IMF until 2019 when she became the President of the European Central Bank.



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Consider the Environment When Designing CBDCs, IMF Urges

<div id="highlights-block_62713125a2ba4" class="highlights">
 <ul>
 <li>Banco Galicia’s move targets young clients and highlights a global trend in crypto adoption by traditional banks</li>
 <li>Argentines are increasingly using cryptocurrency to protect their savings against rampant inflation</li>
 </ul>
 
</div>



Banco Galicia, Argentina’s biggest private bank by market cap, has added crypto trading to its investment platform, the bank confirmed Monday. Argentines rank among the world’s top adopters of digital assets in part due to inflation in the South American country.



The move targets young clients, who survey data shows want streamlined access to crypto via traditional banking avenues, the bank’s senior product manager Nicolas de Giovanni told <a href="https://www.bloomberg.com/news/articles/2022-05-02/two-argentine-banks-allow-customers-to-buy-cryptocurrencies" target="_blank" rel="noreferrer noopener">Bloomberg</a>.&nbsp;



Clients can buy digital assets on the same platform they use to buy stocks or bonds through the bank’s partnership with crypto wallet <a href="https://www.lirium.com/" target="_blank" rel="noreferrer noopener">Lirium</a>. Unlike with other exchanges, however, users can’t withdraw or send their cryptocurrency.



The bank confirmed it was launching crypto trading in the home banking app after Argentines spotted the new function on Monday. The feature will initially only be available to clients who receive their income via direct deposit.



Banco Galicia, which is listed on the Nasdaq and the Buenos Aires stock exchange, is the first major bank in the country to provide such services.



But it won’t be the only one: Digital bank Brubank SAU will also offer crypto trading services, including bitcoin, ether and USDC, starting this week as well.&nbsp;



Until now, Argentines had to use centralized exchanges through wallets or trade directly through over-the-counter exchanges.



Argentina has been grappling with high inflation and the devaluation of its currency, the peso, for years now. In 2017 it received a $44 billion bailout from the International Monetary Fund, the institution’s largest-ever relief package. Locals in turn have started investing in crypto to protect their savings from shrinking purchasing power.



Banco Galicia joins a growing number of traditional banks worldwide moving into digital assets. Last month, Commerzbank, Germany’s fourth-largest bank, confirmed it <a href="https://cms.blockworks.co/german-banking-giants-move-into-crypto-highlights-growing-trend-in-europe/" target="_blank" rel="noreferrer noopener">wants to offer digital assets</a> custody and exchange services to clients, focusing initially on institutional customers.



In Argentina, as well as other Latin American countries such as El Salvador, crypto adoption is becoming mainstream. Recently, Argentine <a href="https://cms.blockworks.co/argentina-moves-to-incubate-crypto-startups-under-regulatory-eye/" target="_blank" rel="noreferrer noopener">authorities announced an innovation hub</a> to boost fintech and crypto startups in a regulated environment. Employers can also pay up to 20% of an employee’s salary in cryptocurrencies.



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Argentina’s Biggest Private Bank Adds Crypto Trading

Macauley Peterson

<div id="highlights-block_62548c57b453e" class="highlights">
 <ul>
 <li>The study considered seven variables to account for a prevalence for crypto adoption in 53 countries to determine which were most significant</li>
 <li>The IMF also highlighted the role cryptoassets can play in providing transparency for procurement or other payments related to government projects</li>
 </ul>
 
</div>



Cryptoassets have “unleashed a plethora of financial innovation that will likely revolutionize the form of money and the ways it is used,” a recently published International Monetary Fund report said, but the multilateral lender cautioned that, without regulation, cryptoassets may also facilitate illicit capital flows.



In an alliteratively titled <a href="https://www.imf.org/en/Publications/WP/Issues/2022/03/25/Crypto-Corruption-and-Capital-Controls-Cross-Country-Correlations-515676" target="_blank" rel="noreferrer noopener">working paper</a> — Crypto, Corruption, and Capital Controls: Cross-Country Correlations — IMF researchers concluded that, based on crypto usage data drawn from Statista’s <a href="https://www.statista.com/global-consumer-survey" target="_blank" rel="noreferrer noopener">Global Consumer Survey</a>, “cryptoasset usage is significantly and positively associated with corruption and capital controls.”



But the paper goes beyond identifying correlation to say that “that cryptoassets may be used to transfer corruption proceeds or circumvent capital controls” and calls on regulators to “bring empirical evidence to bear on the question of whether cryptoassets facilitate corruption.”



The researchers noted that cryptocurrencies are hardly unique in that respect, though, pointing out that the anonymity of cash, especially large denomination notes, is exploited for crime and tax evasion. 



<h3 class="wp-block-heading">Interpretation is key</h3>



The authors evaluated crypto adoption depending on seven variables, including inflation rates, remittances and GDP per capita, but determined that control of corruption and capital controls are clearly the most significant factors.



The question for regulators is, what accounts for the correlation?



&#8220;While there are certainly examples of bad actors using cryptoassets to circumvent oversight, these individuals are not the driving factor for the higher rates of crypto adoption we’re seeing in countries with prevalent corruption,” said Budd White, chief product officer and co-founder at Tacen, a Wyoming crypto compliance firm.



<blockquote class="wp-block-quote">“Cryptocurrencies inherently operate outside the systems that facilitate corrupt government officials, and thus offer individuals a secure means of protecting their own assets,” White told Blockworks.</blockquote>



The IMF report’s authors found both factors were practically indistinguishable in terms of their significance within the survey data. But the practical implementation of capital controls is itself a highly nuanced affair, according to Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association. Just because capital controls exist doesn’t mean they are functioning well, she told Blockworks.



<blockquote class="wp-block-quote">“Consumers understand the degree of corruption inherent in their financial sector and economy and seek a financially inclusive, transparent and independent form of exchange through crypto,” Kusz said.</blockquote>



Transparency is commonly considered an antidote to corruption, and the paper notes that “these technologies could also be used to improve transparency and record-keeping for procurement or other payments related to government projects, thereby increasing accountability, and reducing the scope for corruption.”



That puts the IMF framing squarely in the <a href="https://www.forbes.com/sites/forbesfinancecouncil/2019/10/03/if-you-believe-in-the-promise-of-blockchain-you-believe-in-cryptocurrency" target="_blank" rel="noreferrer noopener">“blockchain not crypto”</a> school of thought. The authors specifically mention the potential of central bank digital currencies (CBDC) to “offer additional resilience, safety and availability with lower costs,” concluding that “work should continue in using the technologies underlying crypto assets to realize the potential benefits to financial inclusion and the efficiency of governments.”



The authors analyzed data from surveys of 2,000 to 12,000 people in 53 countries. They highlight a need for better data on adoption trends, citing limitations of earlier studies and a lack of sufficient high-quality data.



Yet, regulators should not wait for “conclusive evidence,” the authors contend, but should consider “the urgency of acting before it’s too late.”



However, the efficiency benefits of a CBDC are only useful in the absence of corruption. For a citizen fleeing a corrupt regime, attempting to preserve the value of their savings, the censorship resistance inherent to crypto is paramount.



So, the question becomes, “too late for whom?”



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Is Crypto Fueling Corruption or Helping Citizens Flee It?

<div id="highlights-block_623b30beda87c" class="highlights">
 <ul>
 <li>El Salvador is changing its approach to the bond issuance, delaying and modifying the previously announced plan</li>
 <li>The successful roll out of bitcoin mining is seen as key for President Nayib Bukele’s government as prospects for International Monetary Fund funding are slim</li>
 </ul>
 
</div>



El Salvador has postponed the issue of its highly anticipated volcano bonds, which were originally slated to be issued by March 20, according to Finance Minister Alejandro Zelaya.&nbsp;



Nayib Bukele, El Salvador’s president, introduced the bitcoin-backed bonds in November 2021. They are supposed to raise $1 billion for the Central American nation’s “bitcoin city,” a community at the foot of the <a href="https://en.wikipedia.org/wiki/Conchagua_(volcano)" target="_blank" rel="noreferrer noopener">Conchagua volcano</a>, complete with mining operations and low taxes, Bukele promised.



Zelaya told bondholders earlier this month that the bitcoin bonds will now be backed by La Geo, a state-owned thermal company, according to Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial.



Zelaya had previously stated that the war in Ukraine might impact timing of the bond issuance, with market appetite for risky assets dwindling.



The bonds will be issued on the Liquid Network, a Bitcoin layer-2 established by <a href="https://cms.blockworks.co/?s=blockstream" target="_blank" rel="noreferrer noopener">Blockstream</a>. While Blockstream is providing the technology, it is not working directly with the El Salvador government on the bonds, a spokesperson from the company said.



Launching the bond is still essential for combating El Salvador’s slim loan prospects and mounting debt, Marshik said. The International Monetary Fund has <a href="https://cms.blockworks.co/el-salvadors-volcano-bond-could-launch-this-week/" target="_blank" rel="noreferrer noopener">made clear its disdain</a> for the adoption of bitcoin as legal tender.



The postponement comes as speculation around other Latin American countries leaning into digital assets swells. <a href="https://digitnews.in/the-president-of-honduras-may-announce-the-legalization-of-bitcoin-in-the-country-tomorrow/" target="_blank" rel="noreferrer noopener">Honduras</a> or Malaysia may become the second nation after El Salvador to adopt bitcoin as legal tender, <a href="https://www.thestreet.com/investing/cryptocurrency/malaysia-may-be-the-next-country-to-make-bitcoin-legal-tender" target="_blank" rel="noreferrer noopener">according to news reports</a>.



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El Salvador Delays Volcano Bond Issue, Unveils State-owned Company Backing

<div id="highlights-block_622f9bc254635" class="highlights">
 <ul>
 <li>The so-called &#8220;volcano bonds&#8221; would be the first bitcoin-backed bonds issued by a country</li>
 <li>The International Monetary Fund has urged El Salvador to remove bitcoin as legal tender, citing volatility and additional risk for the country’s citizens</li>
 </ul>
 
</div>



As El Salvador dives deeper into bitcoin, the country’s closely watched and controversial &#8220;volcano bonds&#8221; could launch as soon as Tuesday.



Finance Minister Alejandro Zelaya told a local TV channel that “between March 15 and 20 is the right timing,” adding that the country has “the tools almost finished.”&nbsp;



“But the international context will tell us&#8230;I didn&#8217;t expect the war in Ukraine,&#8221; Zelaya <a href="https://www.reuters.com/technology/el-salvador-says-could-launch-bitcoin-sovereign-bond-between-march-15-20-2022-03-11/" target="_blank" rel="noreferrer noopener">reportedly said</a>.



Launching the bitcoin bond — dubbed the “<a href="https://cms.blockworks.co/el-salvador-plans-bitcoin-city-funded-by-bitcoin-bonds-and-powered-by-a-volcano/" target="_blank" rel="noreferrer noopener">volcano bond</a>” after the mining operation’s power source, the Conchagua volcano — has become increasingly important due to the country’s slim loan prospects and mounting debt, Nathalie Marshik, head of emerging markets sovereign research at Stifel Financial, said.



No details, regulatory framework or prospectus has been issued regarding the bonds, Marshik pointed out, making it difficult to predict demand for the offering.



<blockquote class="wp-block-quote">“These bonds started as a sovereign bond,” Marshik said. “Now, it is a securitized corporate bond, which [raises] the question of success.”</blockquote>



A loan from the International Monetary Fund (IMF), which has urged El Salvador to remove bitcoin’s status as legal tender, is unlikely, according to Marshik.



“Odds of an IMF loan are nil,” she said. “[El Salvador officials] are going around saying they have a pension reform pending, and they will get a $590 million bond from the pension system.”



Bitcoin poses significant risks to financial stability and consumer protection, IMF executive directors said in January in a <a href="https://www.imf.org/en/News/Articles/2022/01/25/pr2213-el-salvador-imf-executive-board-concludes-2021-article-iv-consultation" target="_blank" rel="noreferrer noopener">statement</a> about El Salvador’s financial health.



“[Directors] stressed that there are large risks associated with the use of bitcoin,” the statement said. “They urged the authorities to narrow the scope of the bitcoin law by removing bitcoin’s legal tender status.”



The IMF expects El Salvador’s fiscal deficit to reach 5.75% of gross domestic product (GDP) in 2021 and about 5% of GDP in 2022. Public debt is also anticipated to rise to about 96% of GDP in 2026. Given the circumstances, the IMF estimates El Salvador is on an “unsustainable path.”



<blockquote class="wp-block-quote">“The IMF forecasts a primary balance for 2022, yet says the debt is unsustainable under current policies,” Marshik said. “El Salvador needs a 3% of GDP adjustment to get the debt to a sustainable level.”</blockquote>



Persistent fiscal deficits and high debt service are leading to large and increasing financing needs, the IMF report noted.&nbsp;



El Salvador has an $800 million bond maturing in January 2023. In July 2021, ratings agency Moody’s downgraded the country’s debt rating to CAA1 — putting it at risk of default.



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