Why the IMF urges El Salvador to withdraw bitcoin as legal tender

In El Salvador you can buy goods and services with bitcoin.

Photo: REUTERS / copyright

The International Monetary Fund (IMF) has urged El Salvador to reverse its decision to convert bitcoin into legal tender.

After the conclusion of the Article IV consultation with El Salvador, in which the management of the pandemic and the implementation of bitcoin as a form of payment were analyzed, the IMF executive board warned President Nayib Bukele that the adoption of the cryptocurrency generates “serious” risks for the country.

One of them is that it would be difficult for him to obtain a loan from the agency.

“The adoption of a cryptocurrency as legal tender implies serious risks to financial and market integrity, financial stability and consumer protection and may give rise to contingent tax liabilities,” the agency said in a statement.

For this reason, the institution’s executive board urged the Salvadoran authorities to “reduce the scope of the Bitcoin Law removing bitcoin statusas legal tender.

Last September, El Salvador became the first country in the world to allow the use of cryptocurrency in all transactions, along with the US dollar.

The decision caused large scale protests for fear that the measure would cause more instability and inflation in the Central American nation.

Since November, bitcoin has lost roughly half its value.

Fiscal vulnerabilities “exacerbated” during the pandemic

The IMF also raised concerns about the issuance of cryptocurrency-backed bonds.

El Salvador plans to issue bitcoin bonds between February and March of this year, as announced by the Minister of Finance, Alejandro Zelaya. The Salvadoran government hopes that the “strategy will be successful.”

The president of El Salvador, Nayib Bukele, presenting his plan for the first "BitcoinCity".

The president of El Salvador, Nayib Bukele, presenting his plan for the first “Bitcoin City”.

The IMF executive board also warned that the Central American country’s fiscal vulnerabilities “have become more acute during the pandemic and require immediate action.”

“Large and growing financing needs are limiting growth in the medium term and they highlighted the need to implement structural fiscal reforms,” he added.

When El Salvador introduced cryptocurrency as legal tender, the government launched the “Chivo” digital wallet and gave every Salvadoran citizen $30 worth of bitcoin.

The Bukele government presented the measure as a form of drive economic development and employment, but for now it only divides opinions in the country.

Following the announcement, businesses are required to accept digital currencies as payment, wherever possible.

Bitcoin is a controversial currency in part because its value can fluctuate significantly: Has risen and fallen drastically over the last year.

It was trading at around $37,000 on Tuesday, having lost about half its value compared to a record high of $67,734 in November.

President Bukele announced plans in November to build a “Bitcoin City” at the base of a volcano in El Salvador, using cryptocurrency to fund the project.

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