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Explained: Why IMF does not support El Salvador’s use of Bitcoin as legal tender

Explained: Why IMF does not support El Salvador’s use of Bitcoin as legal tender

Explained: Why IMF does not support El Salvador’s use of Bitcoin as legal tender
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By Nov 25, 2021 4:41:21 PM IST (Published)

El Salvador became the first country in the world to adopt Bitcoin as a legal tender in September. However, the International Monetary Fund (IMF) has warned of the risks to financial integrity, consumer protection, and financial stability.

The International Monetary Fund (IMF) believes El Salvador, a Central American country, should not use Bitcoin as legal tender. The reason: risks related to the digital currency.

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“Given Bitcoin’s high price volatility, its use as a legal tender entails significant risk to consumer protection, financial integrity, and financial stability,” IMF said in a statement, adding its use also “gives rise to fiscal contingent liabilities.”
The IMF statement comes just days after El Salvador President Nayib Bukele announced plans to set up a Bitcoin City, funded via $1 billion bitcoin bonds. In September, El Salvador became the first country to adopt Bitcoin as a legal tender. It also launched a wallet called Chivo to facilitate Bitcoin transactions in the country. The launch took place on the same day as the Bitcoin law was enforced in the country.
The government deposited $30 as ‘seed money’ in every El Salvadorean’s Chivo wallet to propel bitcoin transactions. By the end of September, nearly three million people (over 45 percent of the population) had downloaded the Chivo. IMF warned the see-sawing prices of Bitcoin could lead to losses in wealth for businesses and households.

IMF, which assists member nations with financial deficits, and provides technical advice, had also published a blog in July 2021 pointing out its concerns on the adoption of Bitcoin as a national currency. It had discouraged other nations from considering the move.
“Some countries may be tempted by a shortcut: adopting crypto assets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits,” IMF said.
More than 75 percent of El Salvador's population is unbanked and the leadership intends to enhance financial inclusion by adopting Bitcoin as their national currency and enabling transactions with a native wallet.
Before the Bitcoin announcement, El Salvador used USD as its national currency. Douglas Rodriguez, the President of El Salvador’s central bank, has reiterated the country intends to use Bitcoin in parallel with the USD and not as a replacement.
The IMF believes if the goods and services of the country had to be priced in USD and Bitcoin, businesses and households would be left perplexed in deciding which method of payment would be best suited for them. Domestic prices could also become prone to fluctuations following the daily volatility of bitcoin, making them highly unstable.

Adopting Bitcoin as legal tender also means some of the government’s revenues will be denominated in digital currency. The IMF said that government revenues would also become exposed to the USD-bitcoin exchange rate if taxes were to be pre-quoted in crypto assets while their expenditures were in USD.
IMF also fears the financial integrity of a nation could become compromised by making bitcoin a legal tender in the absence of anti-money laundering laws and regulatory measures. Issues like tax evasion and terror financing will have to be countered with robust systems and laws.
Responding to IMF comments, Bukele said: “Although we obviously do not agree on some things, such as the adoption of #Bitcoin, the analysis it makes of our country is interesting,” per a Reuters report.
The IMF has estimated El Salvador's economy will grow around 10 percent and 3.2 percent, respectively in 2021 and 2022. It expects the Central American nation's public debt to reach 85 percent of its GDP by the end of 2021, the Reuters report said.

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