IMF urges El Salvador shouldn’t use Bitcoin, citing ‘large risks’

    27 Jan 2022

    The International Monetary Fund (IMF) urged El Salvador to strip Bitcoin of its status as legal currency due to its large risks, citing it as a significant obstacle for the nation’s efforts to get a loan from the institution. This follows El Salvador asking the IMF for a $1.3 billion loan last year, but the lender’s concerns about Bitcoin halted talks.

    El Salvador last year sought a $1.3 billion IMF loan, but the lender’s Bitcoin concerns have hampered talks, and any program would need to be approved by the board.

    As Bloomberg reported, the IMF executive directors, representing the fund’s 190 member nations, highlighted Bitcoin’s risks to “financial stability, financial integrity, and consumer protection” and fiscal contingent liabilities in Tuesday’s statement. As a result, they urged the authorities “to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.”

    The fund said that some directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds. The comments came in the board’s discussion of the Central American nation’s annual Article IV economic evaluation.

    El Salvador in September made Bitcoin a legal tender alongside the U.S. dollar, making 40-year-old President Nayib Bukele an icon among crypto enthusiasts. El Salvador is the only country to have adopted Bitcoin as legal tender so far.

    Following this, Fitch Ratings said that this move poses a serious risk to its local insurance companies. Fitch warned that Salvadoran insurers will be under pressure to quickly convert Bitcoin to dollars to avoid price risk; otherwise, they could face steep losses.

    The nation began buying Bitcoin last year when it was trading around $50,000 and has bought at least 1,801 coins. It has fallen 45% from its peak of almost $68,000 in November. According to Bloomberg’s estimation, the nation has likely lost about $20 million.

    In November, El Salvador’s President announced plans to create a “Bitcoin City” near a volcano funded by the cryptocurrency. Also, the country partnered with Blockstream, a digital assets infrastructure company, aiming to raise about $1 billion via a “Bitcoin Bond.”

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