The International Monetary Fund (IMF) on Tuesday “urged” El Salvador’s government to rescind the legal tender status it bestowed to Bitcoin, a type of cryptocurrency, in September 2021, indicating that its failure to do so could hinder El Salvador’s intention of securing a future loan from the financial institution.
The IMF’s executive board met with Salvadoran government officials on January 24 for an annual “Article IV consultation,” which serves as a culmination of the IMF’s regular surveillance of a member nation’s economic policies. During the meeting, IMF directors “urged” El Salvador’s government authorities “to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status,” according to a press release issued by the organization on January 25.
El Salvador became the first country in the world to adopt Bitcoin as a legal tender in September 2021. Financial analysts predicted the development could jeopardize El Salvador’s plans at the time to ask the IMF for a loan of $1.3 billion, as the lender views the cryptocurrency world as demonstrating “inadequate disclosure and oversight.” The IMF formally addressed El Salvador’s adoption of Bitcoin for the first time on January 25 during their consultation.
“[T]here are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities,” the fund’s board said.
The IMF on Tuesday offered limited praise of El Salvador’s “Chivo e-wallet,” which it said could help facilitate a system of “financial inclusion” in the country in alignment with the international lender’s objectives. El Salvador’s government established the smartphone application-based “Chivo e-wallet” in 2021 to directly support its adoption of Bitcoin as a legal tender. The administration El Salvadoran President Nayib Bukele created the digital payment system to facilitate Salvadorans’ acceptance and use of Bitcoin.
“President Nayib Bukele has said any Salvadoran can download the government digital wallet ‘CHIVO’ — a local word meaning ‘good’ — to accept payments in bitcoin or dollars,” Reuters reported in September 2021.
“Having installed the app on their phones, they will be able to withdraw dollars from government-backed cash machines,” the news agency detailed.
Bukele’s administration said it primarily chose to adopt Bitcoin as a legal tender to help Salvadorans retain a collective $400 million lost each year through traditional remittance transaction fees. Remittances — or money sent home by citizens living abroad — account for roughly 23 percent of El Salvador’s GDP.
“In practice, El Salvador does not have its own currency,” Reuters observed in June 2021.
The Central American nation has continued to use the U.S. dollar as a legal tender (adopted in 2001) in addition to Bitcoin since September 2021.
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