HAVANA TIMES – The International Monetary Fund (IMF) has urged El Salvador to stop using Bitcoin as their legal tender, due to “high associated risks”. The IMF statement, released on Tuesday, January 25, represents a setback to President Nayib Bukele, an enthusiastic promotor of the cryptocurrency.
The IMF executive board strongly advised the Salvadoran government to end the official use of Bitcoin, a policy the Bukele government adopted in September. 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.”
The IMF statement “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.”
“Some directors also manifested concert regarding the risks associated with issuing Bitcoin backed bonds,” the text added. The statement was issued after the IMF directive board had concluded their periodic review of the country’s finances, in a process known as “Article IV Consultation”.
On September 7, 2021, El Salvador became the first country in the world to establish Bitcoin as their official currency. The government legalized its use in all transactions, alongside the US dollar. The latter has been the legal currency of the Central American country for two decades.
The IMF executive board is composed of representatives of all the member countries, including its principal shareholder, the US. Previous to the current plea that Bitcoin be phased out as the official currency, IMF technical personnel had warned against the use of the cryptocurrency, given its “high volatility.”
“Bitcoin shouldn’t be adopted as the legal tender,” IMF functionaries stated in November, upon concluding the technical evaluation of the Salvadoran economy.
At that time, the technical team asked the government to limit the legal scope of Bitcoin and “immediately implement strong regulation and supervision” of the new payment system, to prevent money laundering and the use of the program to finance terrorism, as well as generating serious risks.
On Tuesday, January 25, the IMF executive board recognized that digital means of payment could contribute to greater participation in El Salvador’s banking system. However, they called on the government to exercise greater controls.
“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,” the Fund’s statement affirmed.
The “Chivo e-wallet” is an electronic payment system Bukele has promoted, allowing Salvadorans within and outside the country to use their cellphones to realize Bitcoin transactions.
“The future won’t wait”
Bukele offered no immediate reaction to the IMF Board’s evaluation.
Alejandro Zelaya, Bukele’s interior minister, limited his comments to a Tweet emphasizing the part of the IMF statement that stressed the importance of promoting financial inclusion.
“’It’s functioning as a way of boosting financial inclusion, but you shouldn’t be doing it,’ he paraphrased the statement. The future won’t wait for anyone. #Bitcoin,” Zelaya wrote.
The Bukele government wants to use Bitcoin to help capture millions of dollars in commissions from the family remittances that Salvadorans send back from other countries through financial institutions. In 2020, these represented 22 percent of El Salvador’s GNP.
On Friday, January 28, the Central Bank of El Salvador announced that the family remittances received in 2021 totaled over 7.5 billion dollars. These grew 26.8% with respect to 2020, comprising “record earnings”.
The introduction of Bitcoin as legal tender in El Salvador was questioned within and outside the country. It originally sparked widespread protests on the streets of the capital city.
That didn’t dissuade Bukele, who in November revealed plans to build the world’s first “Bitcoin city” in the coastal town of Conchagua. A volcano with the same name is located there, and could supply the energy for the computerized process known as “Bitcoin mining”, used to enter new Bitcoins into circulation.
At that time, Bukele also announced the emission of a billion dollars in “Bitcoin bonds”.
Bitcoin is a digital currency that was created in 2009, following the financial crisis of 2008. However, the future of this cryptocurrency appears uncertain in 2022. After reaching record highs in 2021, thanks to the appetite of traditional financial markets for this new type of investment, its value dropped precipitously.
At the end of January, Bitcoin was trading at US $37,000, compared to the record high of $67,734 it reached in November 2021.