IMF warns El Salvador against using Bitcoin, cites threats to financial stability

IMF warns El Salvador against using Bitcoin, cites threats to financial stability
11 months ago
2 mins read

The International Monetary Fund (IMF) has warned El Salvador against using Bitcoin as a legal tender stating that the move carries risks to the financial system.

In a statement, The IMF acknowledged that Bitcoin and cryptocurrencies at large can facilitate efficient payments, but declaring them a legal tender will potentially erode financial stability. 

“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities,” IMF said.

Furthermore, the agency called on El Salvador to narrow the scope of the Bitcoin law and strengthen the regulation and supervision of the new payment ecosystem. 

In September, El Salvador became the first country globally to declare Bitcoin a legal tender, a move that has been with mixed reactions. 

The government later rolled out an e-wallet system dubbed Chivo that allows residents to manage Bitcoin payments. Consequently, the IMF noted that the wallet is a major stride towards achieving financial inclusion. 

However, the lender insisted that the Chivo wallet needs to guarantee safety for consumers’ funds, both fiat and cryptocurrencies. Notably, the IMF recommended stronger regulation and oversight, including anti-money laundering and counter financing of terrorism and risk management. 

El Salvador’s ‘Bitcoin City’

The IMF warning comes barely a week after El Salvador president Nayib Bukele announced the country is planning to build the world’s first ‘Bitcoin City’, funded by Bitcoin bonds.

Additionally, IMF also raised a red flag with the Bitcoin bonds stating that they should undergo very careful analysis of implications and potential risks to the country’s financial stability.

Besides the IMF, other financial sector opinion leaders have warned against the country’s move to adopt Bitcoin. As we previously reported, Professor of Applied Economics at Johns Hopkins University Steve Hanke warned that El Salvador’s decision to legalize Bitcoin would have consequences terming the move as economic stupidity.

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Justinas Baltrusaitis

Justin crafts insightful data-driven stories on finance, banking, and digital assets. His reports were cited by many influential outlets globally like Forbes, Financial Times, CNBC, Bloomberg, Business Insider, Nasdaq.com, Investing.com, Reuters, among others.