IMF warns against El Salvador’s Bitcoin experiment amid calls for greater transparency
El Salvador’s embrace of Bitcoin has yet to realize any initially predicted risks. However, there is still a need for greater transparency and attention, according to a statement from the International Monetary Fund (IMF) after a visit to the country on 10 February.
“While risks have not materialized due to the limited Bitcoin use so far – as suggested by survey and money transfer data – use could grow given legal tender status and new legislative reforms to encourage the use of crypto-assets, including tokenized bonds ( Digital Assets) Law) […]
Greater transparency over the government’s transactions in Bitcoin and the financial situation of the state-owned Bitcoin wallet (Chivo) remains important, especially to assess the underlying fiscal conditions and counterparty risk.
The IMF’s statement came after a $600 million bond payment by El Salvador last month, which pre-empted the IMF’s “Article IV” visit to the country, which took place between January 30-February 8.
The visit was the third by IMG since El Salvador’s decision to make Bitcoin legal tender in September 2021. A decision that was officially believed to have closed the doors to further IMF funding, the IMF stressed after its latest visit to the country that while it does not agree with El Salvador adopting Bitcoin as legal tender, some of the main risks have so far been avoided.
It warned, however, that even if some of the initial risks associated with El Salvador’s adoption of Bitcoin have not materialized, it would be unwise for the Latin American nation to continue pursuing a policy of its own monetary sovereignty, despite lacks its own currency (previously it was solely dependent on the US dollar as legal tender).
“Financing the purchase of Bitcoin by issuing tokenized securities should be avoided due to financial risk[…] The use of the proceeds of the new Bitcoin Fund Management should follow regular expenditure controls and good governance practices.”
All this comes later El Salvador’s Congress passed a law regulating the issuance of digital assets by government and private entities, which passed on January 11. The law allows the government to sell government bonds backed by Bitcoin, a policy the IMF warns against.
Also, El Salvador plans to use these bonds to build a “Bitcoin City”, connected to a local volcano, Bukele’s big vision is to use the volcano’s energy to mine pure Bitcoin.
But since the announcement his country would accept the cryptocurrency as legal tender and make an initial purchase of several hundred Bitcoins in September 2021, the country’s total Bitcoin holdings are down 57% from their peak value.
Despite these concerns, the IMF praised El Salvador’s economy in its February 10 report for its “full recovery” to pre-pandemic levels. The IMF estimates that the country’s real GDP will grow by 2.4 percent in 2023, above the historical average.
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