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Home » IMF warns El Salvador – suggests Bitcoin is a threat to stability

IMF warns El Salvador – suggests Bitcoin is a threat to stability

Lucas N by Lucas N
July 1, 2022
in Currencies
MF entrance with sign of International Monetary Fund and logo
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The International Monetary Fund (IMF) has urged El Salvador not to use Bitcoin as legal tender, suggesting the cryptocurrency poses a risk to the country’s economic stability. 

IMF fires warning shots

Is anyone surprised that the IMF does not regard cryptocurrencies like Bitcoin as the equivalent of fiat money? Although the powerful organisation suggested cryptocurrencies could indeed replace fiat, its latest announcement suggests it does not hold the use of Bitcoin in high regard.

In a statement, the IMF declared the use of Bitcoin in countries like El Salvador a threat to their financial stability. It said: “Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities.” The IMF suggested that El Salvador narrow the scope of its Bitcoin law. 

In its announcement, the IMF also noted that the issuance of a $1.2 billion AUD bitcoin-backed bond announced by El Salvador’s President Nayib Bukele in late November was not discussed in meetings between the agency’s representatives and government officials. Further Bitcoin purchases by the country would “require a very careful analysis of implications for, and potential risks to, financial stability.” 

The IMF recommended limiting the trust fund created to facilitate exchanging Bitcoin for USD and cancelling subsidies for the government-issued Chivo Wallet. President Bukele suggested more than 50 percent of Salvadorians were using bitcoin thanks to the introduction of Chivo. The country should also implement stronger regulation and oversight over its new payments ecosystem, and funds from Chivo should be segregated and ring-fenced as reserve assets. The IMF also advised El Salvador to add safeguards to its banking regulation, implying that the country should raise its capital and liquidity requirements related to Bitcoin exposure.

Will El Salvador follow the IMF’s advice?

After the country’s much-celebrated (by crypto bulls) introduction of Bitcoin as legal tender this year, El Salvador has had to battle a flurry of negative press and domestic opposition in response to its decision.  

While traditional monetary authorities like the IMF and the SEC have mainly voiced criticism of the country’s supposedly dangerous economic gamble, Salvadorians have been mostly concerned about Bitcoin’s volatility. While volatility is an inconvenience to regulator investors, it can be dangerous to people in economically precarious conditions like much of the country’s population. 

Crypto advocates will probably brush off the IMF advice as yet another “boomer institution” opposing the inevitable rise of cryptocurrencies. However, one should carefully consider whether the agency’s advice can merely be tossed aside or whether there is some truth to it. Ring-fencing reserve assets and requiring banks to maintain solid capital reserves are hardly anti-crypto measures – they are rather sound economic policies any country should follow. 

Although there probably is truth to the statement that the IMF is not interested in technology disrupting the status quo, Bitcoin bulls should hope for their own sake that El Salvador’s crypto adoption succeeds. A good first step would be drawing the right conclusions from this report. 

Lucas N

Lucas N

Lucas N is Coin Culture's managing editor for people and market, covering opinon, interview and market analysis. He owns Near, Aurora and Chainlink

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