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IMF asks El Salvador to abandon the idea of using bitcoin as legal tender

El Salvador recently announced that bitcoin had been made a legal tender in the country, but the International Monetary Fund thinks it is a bad idea.

The IMF’s executive board has advised El Salvador to ditch its recent edict that makes cryptocurrency legal tender. The financial body warned of the risks to financial stability and consumer protection.

Also, using cryptocurrency as legal tender could make it hard for the country to obtain a loan from the IMF.

IMF’s advice came from its staff member visits to the country and their report forwarded to the board. There are other items discussed in the report, but bitcoin takes center stage.

El Salvador official approved bitcoin as a legal tender last year after passing a law to the effect in June. Now, bitcoin competes with the U.S. dollar as a recognized national currency, meaning shoppers can pay for goods using bitcoin.

Here is an excerpt from the IMF report on El Salvador:

“While the law maintains the U.S. dollar as the national unit of account, it mandates the acceptance of Bitcoin by agents, unless technical impediments exist. A new digital means of payments—the e-wallet Chivo operating in both U.S. dollars and Bitcoin—has been introduced and heavily supported by the government to promote financial inclusion (each qualifying citizen who downloaded the application received an endowment of US$30). The law also guarantees the automatic conversion from Bitcoin to U.S. dollars through a trust fund funded with US$150 million from the budget, and in practice the conversion is done in Chivo.”

This is followed by the recommendation to drop bitcoin as a legal tender. “Crypto-technologies and digital payment systems like Chivo have the potential to make payments more efficient, thereby enhancing financial inclusion and supporting growth. 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. Because of those risks, Bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the Bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem. Like for other e-wallets, Chivo should be required to fully safeguard customers’ funds, both in U.S. dollars and Bitcoin, by segregating and ring-fencing reserve assets. “

Notably, the IMF has not asked El Salvador to revoke the law entirely but tone down its scope.

However, El Salvador’s president, Nayib Bukele, is a huge fan of bitcoin and frequently talks about bitcoin on Twitter. He announced the new law making cryptocurrency a legal tender during a press conference in Miami.

El Salvador could have up to 1,500 bitcoin. Bukele recently announced that the country just bought 410 bitcoin for $15 million. He has also proposed floating a $1 billion bitcoin bond for investors to buy into.

Written by HackerVibes

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