Global Economy

IMF urges El Salvador to drop Bitcoin

Published : January 27, 2022 16:16 IST

Many in El Salvador oppose the adoption of bitcoin as legal tender. Photo: Camilo Freedman/SOPA/ZUMA/picture alliance

The IMF cites the risks to national financial stability, consumer protection and the inability to receive loans.

The IMF strongly advised that El Salvador drop the use of cryptocurrency Bitcoin as legal means of payment due to the risks to financial stability and consumer protections in the Central American country. El Salvador was the first country in the world to make Bitcoin legal tender last September. Previously, El Salvador used the U.S. dollar as legal tender since 2001, making the country's monetary policy dependent on the U.S. federal reserve.

In a statement following a meeting on January 25, the IMF cited "large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities." The IMF urged El Salvador to "narrow the scope of the Bitcoin Law by removing Bitcoin's legal tender status," adding the use of the cryptocurrency as legal tender created "contingent liabilities."

Why is bitcoin legal tender in El Salvador?

El Salvador's President Nayib Bukele promoted Bitcoin as a way for residents to save on remittance commissions and expand access to the financial system. The IMF has expressed concern over Bukele's expressed interest in issuing bonds backed by Bitcoin. However, adoption of the cryptocurrency since parliament approved the measure last June has been uneven with only a few businesses accepting Bitcoin and technical issues plaguing the government cryptocurrency app.

Bitcoin nearly doubled in value in 2021 but by January 25 it was just below the value placed on it when El Salvador's legislative assembly approved its usage as legal tender on June 9. Bitcoin did not enter circulation in El Salvador as currency until last September.

Roughly 70 per cent of Salvadoreans have no access to the traditional banking system. Many in the country of roughly six million depend on remittances from relatives based in the U.S. to meet basic expenses. The IMF's directors said that increasing access to the financial system was important and added digital currencies could play a role but that strict regulation and oversight "of the new ecosystem of Chivo and Bitcoin" is needed.

What is Bitcoin?

Bitcoin runs on the energy-intensive blockchain but is not controlled by any central bank or entity. As such, it is subject to extreme volatility as a speculative market trade, something the world's poor in developing nations are much less equipped to handle financially than wealthier traders. Cryptocurrency proponents argue Bitcoin is inclusive and useful to people in the developing world, especially as a safe asset in the event of hyperinflation — though there is scant evidence to back these assertions.

The cryptocurrency market is increasingly dominated by large investors. Central bankers fear the volatility caused by cryptocurrencies could provoke instability in the financial markets, the precise problem cryptocurrency purports to fix. Companies such as Meta, formerly known as Facebook, have begun to look at how to sell off their digital currency assets and patents in recent days as the U.S. federal reserve pushed back against the company's cryptocurrency plans. Several countries are cracking down on private digital currencies.

ar/rs (AFP, AP, dpa, Reuters)