IMF Warns El Salvador to Consider Risks of Bitcoin as Legal Tender

El Salvador has been warned about Bitcoin volatility risks by the IMF in the past.

By Shomik Sen Bhattacharjee | Updated: 24 November 2021 18:50 IST

IMF Warns El Salvador to Consider Risks of Bitcoin as Legal Tender

Photo Credit: Facebook/ Nayib Bukele

El Salvador has welcomed financial inclusion through Bitcoin adoption

Highlights

El Salvador's president now plans on building a Bitcoin City
El Salvador adopted Bitcoin as a legal tender in September
The IMF has issued a statement warning El Salvador yet again

The International Monetary Fund (IMF) has recommended that El Salvador stop using Bitcoin as legal tender, pointing to financial and consumer risks associated with the cryptocurrency, soon after the country's President Nayib Bukele announced plans for the world's first Bitcoin city, powered by a volcano and financed by cryptocurrency bonds. El Salvador, a country that has used the US dollar as its primary fiat for over two decades, legalised Bitcoin as an official tender in September, and has been able to reap profits out of the move too.

In a statement, the IMF acknowledged that Bitcoin, and cryptocurrencies in general, can facilitate efficient payments, but allowing them as legal tender will likely pose problems for financial stability. "Given Bitcoin's high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem," stated the IMF in a statement.

The global agency also called on El Salvador to narrow the scope of its Bitcoin law and strengthen the regulation and supervision of the new payment ecosystem.

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El Salvador plans to build the world's first "Bitcoin City", funded initially by Bitcoin-backed bonds, President Nayib Bukele said over the weekend, doubling down on his bet to harness the cryptocurrency to fuel investment in the Central American country.

Speaking at an event closing a week-long promotion of Bitcoin in El Salvador, Bukele said the city planned in the eastern region of La Union would get geothermal power from a volcano and not levy any taxes except for value-added tax (VAT).

The IMF regularly undertakes Article IV missions to member countries to consult with government officials before they request to use IMF resources. "The plans to issue sovereign bonds and use the proceeds to buy Bitcoin and fund infrastructure plans announced on November 20, occurred after the technical work of the mission concluded, and were not discussed with the authorities," the IMF clarified.

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This isn't the first time the IMF has warned the Latin American country for being Bitcoin-forward. Earlier this year, when El Salvador had just passed its historic Bitcoin Law, the IMF had a predictable reaction of opposing its prospects. Yet, despite its multiple warnings against the risks of a Bitcoin-legalised financial system, El Salvador had powered through with its plan. The country has launched its Bitcoin-powered Chivo Wallet app as well as established multiple ATMs to facilitate daily transactions and remittance transfer in Bitcoin.

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