3D Illustration of waving Bitcoin and El Salvador flag
iStock/Ahmed Zaggoudi

Embracing Bitcoin as a form of legal tender has produced some unintended negative consequences for the government in El Salvador and this will likely limit the appeal to other countries, says Moody’s Investors Service in a new report.

Last year, the Salvadoran government adopted Bitcoin as a second form of legal tender, allowing payments to be made in either the cryptocurrency, or U.S. dollars.

Moody’s said that the move was designed as part of a broader effort to make El Salvador a global hub for crypto generally, and Bitcoin specifically.

However, the “unorthodox” policy has also had some negative unintended consequences for the country’s credit profile, the rating agency said.

“We estimate that, all in, the government has spent about US$375 million on the Bitcoin rollout, including roughly US$106 million from treasury resources to purchase Bitcoin that have resulted in about US$57 million in unrealized losses — further constraining the sovereign’s liquidity,” Moody’s reported.

The policy has also negatively impacted the government’s access to financing, it noted, as the country’s embrace of crypto has “complicated an already strained relationship with the International Monetary Fund (IMF)” — leaving it to rely on other regional, multilateral institutions for funding support.

“We expect the government should be able to have sufficient funding for its upcoming 2023 maturity, with our largest concern focused on willingness to pay,” Moody’s said. “However, without support from large international [multilateral development banks], the government will have trouble repaying its 2025 maturity.”

Moody’s said the likelihood of other countries following the example of El Salvador is low.

“However, we have seen other sovereigns with weak credit profiles and weak monetary institutions move forward with legislation that would integrate Bitcoin or other cryptocurrencies into their economic or monetary framework,” it said.