IMF urges El Salvador to remove Bitcoin as legal tender

The International Monetary Fund (IMF) has urged El Salvador to remove Bitcoin’s legal status, warning it could impact the nation’s ability to receive a loan from the fund.

The government of the country adopted Bitcoin as legal tender in September 2021, with president Nayib Bukele’s decision prompting thousands of Salvodorans to take to the streets to protest at the time.

The IMF’s Executive Board said that the adoption of a cryptocurrency as legal tender entails large risks for financial and market integrity, financial stability, and consumer protection, as well as creating contingent liabilities.

The directors agreed that boosting financial inclusion was important and noted the country’s digital means of payment, like the Chivo e-wallet, could play a role in this. However, they emphasised the need for strict regulation and oversight of the new ecosystem of Chivo and Bitcoin.

The directors stressed that there are large risks associated with the use of Bitcoin and urged authorities to narrow the scope of the Bitcoin law by removing its legal tender status. Some directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.

The use of the cryptocurrency as legal tender could impact its efforts to get a loan from the IMF, according to Bloomberg. The country sought a $1.3 billion IMF loan last year but talks have reportedly been hindered by the fund’s Bitcoin concerns, and any programme would need to be approved by the board.

El Salvador began buying Bitcoin last year and bought around 1,801 coins. Its value has fallen 45% from its peak in early November meaning the nation has lost around $20 million, estimated Bloomberg.

The IMF predicts that El Salvador’s economy is projected to grow around 3.2% in 2022, although public debt vulnerabilities have emerged. The fiscal deficit is projected at 5¾% of GDP in 2021 and about 5% of GDP in 2022.

“Under current policies, public debt is expected to rise to about 96% of GDP in 2026 on an unsustainable path,” said the fund.

The IMF’s demands to El Salvador on Bitcoin show the institution to be on the wrong side of history and is bullish for cryptocurrencies, said Nigel Green, CEO of deVere Group.

“Of course, the situation in El Salvador needs to be monitored extremely carefully and every precaution must be taken to ensure the Bitcoin rollout truly benefits the population,” said Green. “But the IMF asking a pioneering sovereign nation to drop a future-focused financial policy that attempts to bring it out of financial instability and a reliance on another country’s currency shows the institution to be on the wrong side of history.”

Green asked whether the IMF is scared of the future of finance and why the fund wants to continue to pile on debts to poorer countries that they know are unlikely to be able to repay using traditional currencies.

“Low-income countries have long suffered because their currencies are weak and extremely vulnerable to market changes and that triggers rampant inflation,” explained Green. “This is why most developing countries become reliant upon major ‘first-world’ currencies, such as the US dollar, to complete transactions.”

He added that reliance on another country’s currency comes with its own set of problems. For example, a strong US dollar will weigh on emerging-market economic prospects, as developing countries have taken on so much dollar-denominated debt in past decades.

“By adopting cryptocurrency as legal tender these countries then immediately have a currency that isn’t influenced by market conditions within their own economy, nor directly from just one other country’s economy,” said Green. “Bitcoin operates on a global scale and therefore is impacted by wider, global economic changes.”

He also noted cryptocurrencies could help bolster financial inclusion for individuals and businesses in developing countries as they can circumnavigate the biases of traditional banks and other financial services providers.