Bitcoin Plunges, IMF Urges El Salvador to Ditch It
By La Prensa
HAVANA TIMES — The International Monetary Fund (IMF) has urged El Salvador to stop using Bitcoin as legal tender, due to the “high associated risks.” The IMF statement, released on Tuesday, January 25, represents a setback for President Nayib Bukele, an enthusiastic cryptocurrency proponent.
The IMF board has strongly advised the Salvadoran government to end the official use of Bitcoin, a policy the Bukele government adopted in September. They pointed out that there are “significant risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection, as well as possible associated tax liabilities”.
The IMF statement “urged authorities to reduce the scope of Bitcoin law by removing Bitcoin’s legal tender status.”
“Some administrators also expressed agreement regarding the risks associated with issuing Bitcoin-backed bonds,” the text adds. The statement was released after the IMF’s executive board concluded its periodic review of the country’s finances, in a process known as the “Article IV consultation”.
On September 7, 2021, El Salvador became the first country in the world to establish Bitcoin as its official currency. The government has 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’s executive board is made up of representatives from all member countries, including its largest shareholder, the United States. Prior to the current plea for bitcoin to be phased out as an official currency, technical staff at the IMF warned against using the cryptocurrency, given its “high volatility”.
“Bitcoin should not be adopted as legal tender,” IMF officials said in November, following the technical assessment of the Salvadoran economy.
At that time, the technical team asked the government to limit the legal scope of Bitcoin and to “immediately implement strict regulation and supervision” of the new payment system, to prevent money laundering and fraud. use of the program to finance terrorism, as well as generate serious risks.
On Tuesday, January 25, the Executive Board of the IMF recognized that digital means of payment could contribute to greater participation in the Salvadoran banking system. However, they called on the government to exercise greater control.
“Directors agreed on the importance of strengthening financial inclusion and noted that digital means of payment, such as Chivo electronic wallet, could play this role.
“However, they highlighted the need for strict regulation and monitoring of the new ecosystem of Chivo and Bitcoin,” the Fund statement said.
The “chivo e-wallet” is an electronic payment system promoted by Bukele, allowing Salvadorans inside and outside the country to use their mobile phones to carry out Bitcoin transactions.
“The future will not wait”
Bukele offered no immediate reaction to the IMF board’s assessment.
Alejandro Zelaya, Bukele’s interior minister, limited his comments to a Tweet highlighting the part of the IMF statement that highlighted the importance of promoting financial inclusion.
“’It works as a way to boost financial inclusion, but you shouldn’t do it,’ he paraphrased the statement. The future will wait for no one. #Bitcoin,” Zelaya wrote.
The Bukele government wants to use Bitcoin to help capture millions of dollars in commissions on family remittances that Salvadorans send to other countries through financial institutions. In 2020, these accounted for 22% of El Salvador’s GNP.
On Friday, January 28, the Central Bank of El Salvador announced that family remittances received in 2021 amounted to more than $7.5 billion. These increased by 26.8% compared to 2020, including “record revenues”.
The introduction of Bitcoin as legal tender in El Salvador has been questioned inside and outside the country. It originally sparked widespread protests in the streets of the capital.
That didn’t deter Bukele, who in November revealed plans to build the world’s first “Bitcoin City” in the coastal town of Conchagua. A volcano of the same name is located there, and could provide the energy needed for the computerized process known as “Bitcoin mining”, used to put new Bitcoins into circulation.
At that time, Bukele also announced the issuance of one 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 financial markets traditional for this new type of investment, its value fell precipitously.
At the end of January, Bitcoin was trading at US$37,000, down from the all-time high of $67,734 reached in November 2021.
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