The International Monetary Fund (IMF) has called El Salvador to change course and stop using Bitcoin as legal tender, citing significant risks posed by the cryptocurrency.
According to an International Monetary Fund statement published on Tuesday, the organization has advised the country’s authorities to narrow the scope of Bitcoin by removing Bitcoin’s legal tender status.
IMF represents funds of 190 member countries spoke about “Bitcoin risks” for “financial stability and consumer protection.” The IMF also expressed concern about the risks associated with issuing Bitcoin-backed securities.
According to the IMF, adopting a cryptocurrency as legal tender “entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.”
In September 2021, El Salvador became the first country to adopt bitcoin as a legal tender, making the cryptocurrency licit to use in all transactions along with the US dollar.
In November, Salvadoran President Nayib Bukele announced plans to create Bitcoin City, a city built from scratch whose economy will be centered on bitcoin mining powered by a volcano. The country is also planning to build a first wave park in Central America Called “Bitcoin Beach”
The IMF did not like the country’s action and adopted a rigid stance, criticizing bitcoin as legal tender.
Despite being intended to support democracy and free markets, reforms mandated by the IMF in exchange for its loans have historically included slashing social spending and industrial policy cuts.
El Salvador, a low-income, high-debt country, is in talks with the IMF for one of its $1.3 billion loans. One hurdle has been the country’s recent adoption of bitcoin as a legal tender. The IMF signaled that the organization is not at all happy with this idea.
IMF said in their statement:
“Directors agreed on the importance of boosting financial inclusion and noted that digital means of payment—such as the Chivo e-wallet—could play this role. However, they emphasized the need for strict regulation and oversight of the new ecosystem of Chivo and Bitcoin. They stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, consumer protection, and the associated fiscal contingent liabilities. They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. Some Directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.”
In November, the IMF and Bank of England warned El Salvador over its use of bitcoin, citing risks associated with the cryptocurrency, a day after the country announced plans to create the “Bitcoin City.”
The country presently holds 1,651 Bitcoin on the balance sheet of the state fund of El Salvador.
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