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Updated January 26th, 2022 at 16:08 IST

IMF urges El Salvador to remove Bitcoin as legal tender; warns 'there are large risks'

The International Monetary Fund has urged the El Salvador government to discontinue the use of bitcoin as legal tender citing the risks associated with it.

Reported by: Apoorva Kaul
IMF
Image: AP/Pixabay/Shutterstock | Image:self
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The International Monetary Fund has recommended the El Salvador to discontinue the use of bitcoin as legal tender. IMF directors emphasised that there are risks involved with the use of bitcoin on financial stability, financial integrity and protection of consumers. The recommendation came in a press release issued on Tuesday after the International Monetary Fund (IMF) Executive Board (Board) concluded a 2021 ‘Article IV Consultation’ with El Salvador. 

The Executive Directors highlighted the need to have strict regulation on the new ecosystem of Chivo and Bitcoin. The IMF in the press release urged the authorities to limit the scope of the Bitcoin law by removal of its legal tender status. Some Executive Directors expressed concern over the risk involved with the issuance of Bitcoin-backed bonds.

President Nayib Bukele had proposed to adopt Bitcoin as legal tender alongside the US dollar and it was voted in the country's Legislative Assembly in June, according to AP. Since September 2021, the El Salvador government has adopted Bitcoin as legal tender. After nearly doubling in value in 2021, Bitcoin witnessed a drop on Tuesday, January 25, and it was slightly below where it was when congress voted in June, as per the news report. 

"They stressed that there 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. They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status," the IMF said in the press release.  

Pandemic interrupted growth of El Salvador: IMF

The IMF in the press release noted that even though the COVID-19 pandemic has affected the growth of El Salvador, the country is "rebounding quickly". The IMF Executive Board stated that the high debt service is resulting in increasing financing needs. The IMF insisted that the public debt is expected to witness a rise to about 96% of GDP in 2026 under current policies.

Furthermore, the IMF stated that the fiscal deficit of the country is projected at 5.75% of GDP in 2021 and about 5% of GDP in 2022. The IMF noted that the economy of the country is projected to grow by about 10% in 2021 and 3.2% in 2022. The Executive Directors agreed on the importance of bolstering financial inclusion and stressed that the digital means of payment like the Chivo e-wallet could play a part in it. 

Inputs from AP

Image: AP/Pixabay/Shutterstock

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Published January 26th, 2022 at 16:08 IST

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