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The International Monetary Fund (IMF) has called on El Salvador to reverse its decision to grant Bitcoin legal status, citing the “large risks” in using the currency.
El Salvador's government made headlines globally last summer when it announced that it would be granting full legal status to Bitcoin.
On June 9, El Salvador’s Congress passed a law adopting Bitcoin as a form of legal tender and preparations began for the circulation of Bitcoin in the country in September, with consumers able to use it to make payments, alongside the US dollar.
The move was intended to improve the country’s opportunities for innovation, financial inclusion, tourism, investment and economic development, according to a tweet from Nayib Bukele, the country’s leader.
It was also a stark contrast with the crypto crackdowns occurring in countries such as Turkey, India and China.
In its assessment of El Salvador’s outlook, the IMF has cautioned that Bitcoin legalisation “entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.”
Although the IMF agreed on the importance of boosting financial inclusion in the Central American country and noted that digital means of payment, such as the government-backed Chivo e-wallet, could play this role, it urged the implementation of strict regulation and oversight for both Chivo and Bitcoin.
The IMF has urged the El Salvadorian authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status, and some directors at the Washington-based crisis lender also expressed concern over the risks associated with issuing Bitcoin-backed bonds.
However, the IMF’s concerns do not seem to have spooked El Salvador’s President.
Bukele, a baseball cap-wearing populist who hails from the Nuevas Ideas (New Ideas) party, tweeted a meme involving a Simpsons episode from the 90s, “I see you IMF, that’s very nice”, suggesting IMF was showing off to try and get El Salvador’s attention.
Engagement with Bitcoin among some El Salvadorians has been lukewarm. Upon the passage of the Bitcoin law, there were some protests on the street, triggered by concerns over financial stability.
The Central American University, a private institute based in El Salvador, published a survey in December that was hardly a source of optimism for the law: 48.5 percent of respondents felt that the Bitcoin law should be abolished.
Meanwhile, the survey also disclosed that 70.1 percent of respondents had little or no confidence in Bitcoin, compared with 27.3 percent that had confidence in the digital currency (either some or a lot). However, it is unclear to what extent pupils of this institution are representative of the general population.
Prior to the country adopting Bitcoin, El Salvador had an unbanked population of 70 percent. Just one month after the adoption of Bitcoin, the El Salvadoran government reported that 3m people, equivalent to two-thirds of the country's adult population, had downloaded the new Chivo e-wallet developed for the use of Bitcoins.
Chivo was heavily promoted by the government, which incentivised adoption by depositing $30 worth of Bitcoin in the account of every citizen that downloaded it.
However, a survey also reported that 62.9 percent of those respondents had either never used it or had only used it once.
