IMF warns El Salvador of bitcoin-related risks in new statement

El Salvador should not use bitcoin as legal tender due to the financial and consumer risks it poses, International Monetary Fund (IMF) staff wrote in a concluding statement related to a mission in the Central American country. 

"Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability," the November 22 IMF communication states. "Its use also gives rise to fiscal contingent liabilities. Because of those risks, bitcoin should not be used as a legal tender." 

IMF staff say that while it welcomes financial inclusion and growth efforts, El Salvador should address risks related to using bitcoin as legal tender, its "new payments ecosystem" and bitcoin trading. The country made Bitcoin legal tender alongside the U.S. dollar on Sept. 7. 

The IMF makes several recommendations for El Salvador in the statement, including narrowing the scope of the bitcoin law. It also suggests bolstering regulation and oversight of its payment system in order to protect consumers, safeguard against money laundering and terrorism financing (AML/CFT) and manage risk. 

"Like for other e-wallets, Chivo should be required to fully safeguard customers' funds, both in U.S. dollars and Bitcoin, by segregating and ring-fencing reserve assets," the IMF statement says. It did acknowledge that "crypto-technologies" and digital systems can help make payments more efficient. 

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In addition, the IMF recommends that El Salvador consider closing the $150 million trust fund it is using to facilitate Bitcoin to U.S. dollar conversions. 

"Measures to limit fiscal contingent liabilities, such as winding down the trust fund or withdrawing public subsidies to Chivo, should also be promptly considered," the IMF recommends. In addition, it says the country's banking regulations should include safeguards focused on exposure to bitcoin. 

El Salvador's president Nayib Bukele addressed the statement on Twitter shortly after it was published. 

"The IMF just published its technical evaluation of El Salvador for the year 2021," Bukele wrote in Spanish. "And although obviously we don't agree with some things, like the adoption of Bitcoin, their analysis of our country is interesting." He then shared a string of messages with highlighted passages pointing to more-favorable takeaways from the statement.

The IMF and El Salvador have been engaged in talks about a $1.3 billion loan agreement, Bloomberg reported. These concluding statements include staff's preliminary findings after completing an official mission to a country.

The IMF did not evaluate president Bukele's recent announcement that El Salvador would issue so-called bitcoin bonds, as it was announced after the mission ended.

About Author

Kristin Majcher is a senior correspondent at The Block, based in Colombia. She covers the Latin America market. Before joining, she worked as a freelancer with bylines in Fortune, Condé Nast Traveler and MIT Technology Review among other publications.