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Why Does the IMF Recommends El Salvador to Remove Legal Tender Status from Bitcoin?

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The International Monetary Fund (IMF) recommended El Salvador to remove Bitcoin’s legal tender status, due to risks associated with the cryptocurrency’s volatility, and pointed out that this policy represents a major obstacle to obtain a disbursement from the multilateral organization.

Last year, El Salvador requested a $1.3 billion loan from the IMF. However, negotiations have stalled due to concerns on the part of the financial institution’s board of directors over the Bitcoin adoption policy pushed by the Nayib Bukele government.

In September 2021, El Salvador’s Congress made Bitcoin a legal tender, which implies that businesses and banks in the country will have to accept the cryptocurrency as a form of payment or deposit. The announcement generated protests throughout the country.

The Central American nation began investing heavily in Bitcoin when the price of the token was worth around $50,000. Since its peak in November, when it was trading at around $68,000, the price of the cryptocurrency has plummeted by 45%. According to Bloomberg estimates, El Salvador has lost up to $20 million on the investment.

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President Bukele announced the construction of a Bitcoin city in the south of El Salvador, to which the IMF expressed doubts about the backed bonds with which the construction of the city will be financed. (Image: EFE)

In November, El Salvador held LaBitconf —the first Latin American cryptocurrency and blockchain conference— where, amid a euphoric audience, Bukele announced that the country will begin construction of a Bitcoin city.

Bitcoin city is planned to be built in the south of the country and will take advantage of the thermal energy of the Conchagua volcano to do Bitcoin mining. The president himself assured that the city would only have a value added tax. The project would be financed with bonds linked to the value of Bitcoin, which caused concern among some members of the IMF board of directors.

In its letter, the IMF pointed out that El Salvador is in a fiscal situation where its public debt could reach up to 96% of GDP by 2026. During the pandemic, the Central American country’s economy contracted by 7.9%, grew by approximately 10% during 2021 and is expected to grow by about 3.2% in 2022.

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As Chivo Wallet adoption grows in El Salvador, the IMF recommends “strict regulation” of the digital wallet. (Image: EFE)

The IMF board acknowledged that the establishment of the digital wallet Chivo Wallet —where Salvadoran citizens can deposit their cryptocurrencie— could boost financial inclusion in El Salvador. However, they emphasize the need for “strict regulation and oversight of the new ecosystem.”

At present, El Salvador’s new digital wallet is becoming competition for payment companies such as Western Union for sending remittances to El Salvador, where the transaction costs of the Salvadoran wallet are substantially lower than those of American payment companies.

“There are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as associated fiscal contingent liabilities,” warns the IMF document, which ends by requesting the Salvadoran government to “reduce the scope of the Bitcoin law by eliminating Bitcoin’s legal tender status.”

Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica

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