El Salvador, IMF calls for removal of Bitcoin as legal tender

The International Monetary Fund (IMF) has urged El Salvador to remove the legal tender status for Bitcoin.

The IMF’s analysis of El Salvador.

The IMF conducted a consultation on El Salvador coming to the conclusion that the country is recovering from the crisis it experienced due to Covid 19. According to the analysis, after a 7.9% recession in 2020, the country’s GDP grew by 10% in 2021 and will grow by 3.2% in 2022. However, the analysis indicates that El Salvador had one of the lowest rates of infections and deaths from Covid 19. 

Nonetheless, vulnerabilities have emerged in the public debt, which is likely to rise to 96% of GDP in 2026. 

About Bitcoin we read that:

“Since September 2021, the government has adopted Bitcoin as legal tender. The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities”.

Bitcoin in El Salvador, the risks according to the IMF

The IMF board believes that El Salvador’s fiscal vulnerabilities have sharply increased during the pandemic. El Salvador would need structural reforms to stimulate growth, cut red tape, and reduce energy costs. In addition, the IMF recommends investment in infrastructure and social spending.

With respect to financial inclusion policies, the IMF welcomed the decision to introduce the Chivo wallet, but calls for serious and strict regulation of Bitcoin. 

The IMF board writes that its members:

“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 bond”.

Essentially, the IMF sees Bitcoin as being able to remain but not as a legal tender, let alone bonds backed by Bitcoin should be issued, which is what will happen to create Bitcoin City. 

The risks associated with Bitcoin

International observers note that the strategy of adopting Bitcoin as a legal currency has worked from a financial inclusion perspective. 

The high number of downloads of the Chivo wallet has contributed to this, also helped by the $30 Bitcoin bonus.

However, there is concern about the choice to invest in Bitcoin. In fact, most of the investments were made when Bitcoin was in its upward phase, culminating with the November ATH that brought the price close to $70,000. Currently, Bitcoin has lost about 40% from those peaks, which means that El Salvador’s investment has also gone down.

If, as many claim, a “crypto winter” is announced that could last even a few years, this could put El Salvador’s coffers in trouble as they will have to rely on the stability of the dollar rather than that of Bitcoin. 

If, on the other hand, the price of BTC would return to rise towards new records then it would be quite evident that President Bukele’s wager was a success.