Technology

Drop Bitcoin as Legal Tender, IMF Urges El Salvador

Jose Cabezas | Reuters
  • The IMF is urging El Salvador to discontinue bitcoin's status as legal tender.
  • In September 2021, El Salvador became the first country to adopt the world's biggest cryptocurrency as legal tender, alongside the U.S. dollar.

The International Monetary Fund is pushing El Salvador to ditch bitcoin as legal tender, according to a statement released on Tuesday.

IMF directors "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 report, which was published after bilateral talks with El Salvador, went on to "urge" authorities to narrow the scope of its bitcoin law by removing bitcoin's status as legal money. In September 2021, the Central American nation became the world's first country to adopt the cryptocurrency as legal tender, alongside the U.S. dollar.

Salvadoran President Nayib Bukele — who has tethered his political fate to the success of the country's bitcoin experiment — has added hundreds of bitcoin to the country's balance sheet in recent months. On Friday, the president tweeted that he bought an additional $15 million of "really cheap" bitcoin, as the crypto market plummeted. Bitcoin is down about 50% from its November record high.

The IMF report went on to say that some directors had expressed concern over the risks associated with issuing bitcoin-backed bonds, referring to the president's plan to raise $1 billion via a "Bitcoin Bond" in partnership with Blockstream, a digital assets infrastructure company.

Part of El Salvador's nationwide move into bitcoin also involved launching a national virtual wallet called Chivo that offers no-fee transactions and allows for quick cross-border payments. For a country where 70% of citizens do not have access to traditional financial services, Chivo is meant to offer a convenient onramp for those who have never been a part of the banking system.

IMF directors agreed that the Chivo e-wallet could facilitate digital means of payment, thereby helping to "boost financial inclusion," though they emphasized the need for "strict regulation and oversight." Many Salvadorans have reported cases of identity theft, in which hackers use their national ID number to open a Chivo e-wallet, in order to claim the free $30 worth of bitcoin offered by the government as an incentive to open a digital wallet.

For months, the IMF has bemoaned Bukele's bitcoin experiment.

Tuesday's statement echoes a report shared by the IMF in November, in which the financial regulator wrote that bitcoin's high price volatility translated to significant risks to consumer protection and noted that bitcoin should not be used as legal tender.

El Salvador has also been trying since early 2021 to secure a $1.3 billion loan from the IMF — an effort that appears to have soured over this bitcoin row.

The country will need to figure out some other backstop to shore up its finances. The IMF predicts that under current policies, public debt will rise to 96% of GDP by 2026, putting the country on "an unsustainable path."

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