Bukele, Bitcoin, the IMF, and Tether

Just as the IMF seemed to tame Bukele's Bitcoin ambitions, Crypto's largest stablecoin announced it will base itself in El Salvador. It has the potential to reshape the country's economy.

Two weeks ago, the headlines suggested that Bukele was moderating his BItcoin policies to appease the IMF and obtain a deal with the international organization. Having made Bitcoin a legal currency in 2021, the IMF convinced Bukele to roll back or restrict several of the more controversial uses or potential uses including (as I understand it; details are subject to change):

• Private companies are no longer forced to accept Bitcoin

• The government will not accept tax payments in Bitcoin (though there will likely be some limited exceptions to this)

• The government will not offer major subsidies/payments in Bitcoin

• The government will unwind its involvement in the Chivo crypto wallet

There are two explanations for why the IMF insisted on these measures. The first is that the IMF hates Bitcoin and all cryptocurrencies, views them as a scam, a threat to international financial stability, and/or a threat to fiat currencies.¹ While I think the IMF is quite skeptical of cryptocurrencies, I don’t think this explains their position in El Salvador.

The second explanation, which is my analysis, is that the IMF viewed Bukele as using Bitcoin as a way to avoid transparency and fiscal accountability in El Salvador. At the beginning of this experiment, in Bukele’s own words, he was trading crypto from his cell phone while sitting on the toilet. That’s not responsible fiscal management. Those crypto accounts weren’t controlled by the national treasury or central bank. They couldn’t be audited. Meanwhile, Bukele was floating the idea of Volcano Bonds, sovereign debt backed by Bitcoin financing geothermal-powered datacenters that would mine additional Bitcoin and allow the country to pay off and escape its other sovereign debt. The whole Bitcoin experiment, despite some innovative ideas within, gave the impression of being a murky slush fund with a wave of corruption scandals hovering around it.

To its credit, El Salvador has actually cleaned this up a fair amount. The nationally-owned Bitcoin is now controlled by a government agency and stored on a cold wallet that can be audited, not simply trades announced on Twitter from Bukele’s cell phone. The IMF’s proposed reforms are improving the management further, making sure that El Salvador’s economy remains dollarized with a tangential Bitcoin experiment attached to it, something that most investors could appreciate and price the risk of, rather than a full dual currency economy that comes with far more significant risks.

There are still issues with El Salvador’s Bitcoin experiment. Bukele continues to surround himself with people who seem to be grifting off his Bitcoin policies. There are questions about the source of the Bitcoin entering the country’s property market. The president’s social media posts still appeal to the hype around the crypto bubble rather than try to treat the issue professionally.²

Still, the IMF’s announcement gave a brief signal that perhaps Bukele understood the importance of pragmatic economic management.

Enter Tether

Yesterday, 13 January, Tether announced that it would move its global headquarters to El Salvador.

I have two types of readers of this newsletter. There are those who have never heard of Tether or have a vague knowledge of the fact that it is a stablecoin, a digital currency that is linked 1-to-1 with the US dollar. And there are readers who have a deep understanding of just how big Tether is and the controversies around it. If you’re in the first category but invested in El Salvador, you should work your way towards the second category. Because there is a risk and opportunity for El Salvador in this deal and there is also a risk to Tether.

Tether reportedly³ has $125 billion in assets, including holding over $80 billion in US treasury bonds, $5 billion in gold, and another $5 billion in Bitcoin. The company is one of the top 20 holders of US Treasury bills in the world. It made over $5 billion in profit last year just by collecting interest on the bonds it owns, not counting additional gains from the appreciation of its other assets. Separately, Tether Investments, the company’s venture capital arm, has a net worth of over $7 billion dollars.

To put the comparison another way, Tether’s $125 billion in assets that back its cryptocurrency is more than 25 times the size of El Salvador’s foreign reserves and larger than the country’s annual GDP. Tether’s total profit last year was about the size of El Salvador’s annual remittances. If Tether decided that Salvadoran government bonds should back just 1% of its USDT holdings - not an unreasonable risk for the main company and certainly a possibility for its growing investment arm - that agreement would be approximately the same size as the recent IMF deal. And comparing it to the IMF agreement isn’t an off-the-wall suggestion given that Tether is closely connected to the group of companies and individuals that had previously structured Bukele’s idea for a Volcano Bond.

In moving to El Salvador, the company becomes the country’s largest company and likely its largest taxpayer, though that status may depend on the agreement between Bukele and the company’s ownership. Given the size of the company compared to the rest of the country, the country’s ability to pay back its loans to the IMF and others in the coming years will increasingly depend on how Tether does as a company.

Why would Tether move from its current safety and obscurity (it doesn’t even have a physical headquarters) in BVI to El Salvador? Taxes are higher. While Bukele seems comfortably in charge right now, political risk is arguably much higher. And Bukele is known for his whims. What if he decides to expropriate the company once it is there, throw the founders in prison, and take over as many of the assets as he can?

That last hypothetical is quite extreme and I doubt Bukele would go that far, but it’s worth asking who is influencing whom in this relationship. If Tether has influence over Bukele, it just gained significant leverage over a nation state, changing how other governments and companies will interact with the company in the future. Given the investigations into Tether, having the cover of a nation-state could make its operations much more secure and give it alternative options should a crackdown occur elsewhere. And if Bukele has influence over Tether, he just obtained access to a giant stash of US T-bills and a stablecoin cryptocurrency used in many legitimate transactions but also heavily in places like Russia and Venezuela that are trying to evade sanctions. That is a lot more global influence for the self-described world’s coolest dictator and philosopher king.

Michael Stott has a great column today on Bukele’s police state domestically and growing influence internationally. Add Tether to the mix, and Bukele’s potential resources multiply. It’s an enormous opportunity for the country and the leader. But it also means that the eventual failure could be much bigger as well.

1. Your preferred exact wording depends on how much you like or dislike Bitcoin.

2. For an example of the opposite, watch Brazil’s Central Bank cautiously and professionally manage its rollout of a digital currency.

3. I say reportedly because there has been some controversy in the past over whether Tether has all of the assets it claims to. Tether has acknowledged those gaps in the past but says that it currently has adequate reserves and that they are audited. In a worst-case scenario, they are short some percentage of those reserves, but it’s still a whole lot of money that they control, which is the more important point for this newsletter post, though not for the financial world as a whole.