(Washington) The International Monetary Fund on Tuesday urged El Salvador to remove bitcoin as legal tender, warning of “significant risks associated with its use for financial stability, financial integrity and consumer protection.”
Posted on January 27
This is a serious setback for the Salvadoran government as the Central American country became the first country in the world to adopt this cryptocurrency on September 7, 13 years after its creation.
The recommendation from the international institution in Washington also casts further discredit on bitcoin, which is particularly volatile.
The first decentralized cryptocurrency has seen its price boosted by the appetite of traditional finance for this new type of investment. After starting 2021 around $20,000, it soared to over $60,000 before experiencing sharp reversals.
The IMF Executive Board urges “the authorities [du Salvador] to reduce the scope of the bitcoin law by removing the legal status of bitcoin,” the institution explained in a press release.
“Some directors also expressed concern about the risks associated with issuing bitcoin-backed bonds,” the text adds.
Bitcoin today has legal value in El Salvador in the same way as the US dollar, which itself replaced the national currency 20 years ago.
Its adoption as a second legal tender was decried in the fall during protests in the streets of San Salvador against the government’s economic policy.
The demonstrators, shouting “the scam”, believed that the adoption of this currency would harm the economy.
Concern of regulators
In November, the Fund itself warned against using bitcoin, given its high volatility.
His recommendation on Tuesday comes on the occasion of the publication of the annual report on the economic situation of El Salvador.
He recalls that the pandemic interrupted 10 years of growth, “but El Salvador is rebounding quickly” thanks to “robust” external demand, “resilient” remittances and “good management of the pandemic”.
The Salvadoran economy had contracted by 7.9% in 2020, before growing by around 10% in 2021. The IMF expects growth of 3.2% this year.
But “public debt vulnerabilities have emerged,” continues the Fund. “Persistent budget deficits and high debt service lead to large and growing financing needs,” he notes.
It is in this context that bitcoin was adopted.
However, this “entails great risks for financial and market integrity, financial stability and consumer protection”, details the Fund. “It can also create contingent liabilities,” he notes.
The cryptocurrency hit a six-month low of $32,970 on Monday.
Bitcoin’s decline began when streaming platform Netflix announced plans for a sharp slowdown in subscriber growth, sending its stock price plummeting and dragging other US tech stocks down in its wake.
Additionally, as prices soar across the globe, the prospect of a US Federal Reserve (Fed) rate hike is driving investors away from riskier assets.
In addition, regulators are increasingly concerned about the place that cryptocurrencies take in the economy. In Russia, the Russian Central Bank thus proposed last Thursday the prohibition of investments and payments in cryptocurrencies.
More moderate, the Spanish market regulator has strongly regulated advertising for trading platforms, and similar measures are being studied elsewhere in Europe, particularly in the United Kingdom and Italy.
The world’s main central banks are studying the possibility of adopting a digital currency to avoid leaving this space to private actors, but they are concerned about the risks to financial stability.
Last week, the US central bank (Fed) indicated that it was still undecided on whether or not to create a digital dollar.