The International Monetary Fund (IMF) has urged El Salvador to drop Bitcoin, the world’s most dominant cryptocurrency, as a legal tender over rising concerns about “financial stability, financial integrity, and consumer protection.”
The Executive Board of the Fund said in a report released on Tuesday after it concluded the Article IV consultation with El Salvador.
The report said “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, and consumer protection, as well as 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.”
The board, however, said while the COVID-19 pandemic disrupted a decade of growth, “El Salvador is rebounding quickly.” The economy contracted by 7.9% in 2020 and is projected to grow by about 10% in 2021 and 3.2% in 2022, the board said.
“Against this backdrop, public debt vulnerabilities emerged,” the board said. “Persistent fiscal deficits and high debt service are leading to large and increasing financing needs.”
El Salvador became the first country to accept bitcoin as legal tender in 2021 despite the uncertainty surrounding the unregulated coin and the entire crypto space. The government gave $30 in free bitcoins to citizens who signed up for its national digital wallet, known as “Chivo,” or “cool” in English, to deepen its adoption.
However, with Bitcoin and other cryptocurrencies falling with the United States plans to raise interest rates in 2022, the country and citizens that invested in the digital currency could be in trouble.