IMF warns El Salvador: Government should reconsider plans to increase exposure to Bitcoin

(Kitco News) The International Monetary Fund (IMF) warned El Salvador of the country’s Bitcoin exposure risk and called for more transparency.

El Salvador became the first country to adopt Bitcoin as legal tender in 2021. The country then went on a Bitcoin buying spree, but the government has not been aware of how much Bitcoin they have bought.

Based on President Nayib Bukele’s tweets, El Salvador bought 2,381 bitcoins, but that doesn’t count Bukele’s November pledge to buy one Bitcoin every day starting November 18.

There is no official record of how much El Salvador bought so far. Reuters estimated that the country bought about 2,470 bitcoins for about $106.4 million.

After a visit to the country, the IMF pointed to risks associated with the country’s exposure to the cryptocurrency, and asked El Salvador to address them.

“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),” says the mission’s closing statement on Friday.

Last month, El Salvador passed a law to regulate the issuance of other digital assets. El Salvador’s Congress voted on the Digital Assets Issuance bill, which allows the country to issue the first round of “volcano bonds” to pay off foreign debt and build up the investment haven “Bitcoin City.”

“Underlying risks to financial integrity and stability, fiscal sustainability and consumer protection persist,” the IMF’s statement said.

The IMF also asked for greater transparency from El Salvador as there is a lot of uncertainty. “Greater transparency about government 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 statement said.

Financing Bitcoin purchases by issuing tokenized securities should be refrained from due to fiscal risks, the IMF stressed, adding that El Salvador should reconsider adding more exposure to Bitcoin.

“Given the legal risks, fiscal fragility and largely speculative nature of crypto markets, governments should reconsider their plans to expand government exposure to Bitcoin, including by issuing tokenized bonds. The use of the proceeds of the new Bitcoin Fund Management should follow regular expenditure controls and good governance practices,” says the IMF’s statement.

At the time, the IMF praised El Salvador’s 2.8% growth last year, highlighting “the unprecedented reduction in crime, and strong remittances and tourism receipts.”

Bukele faced public criticism for his choice to diversify into Bitcoin – a decision that has not been popular with his citizens.

One of Bukele’s main arguments for adopting Bitcoin was to allow his people to save on bank fees when receiving or transferring money from abroad, especially to and from the United States. Money made up more than a quarter of El Salvador’s GDP. A year later, however, the Salvadoran central bank said Bitcoin still accounted for “less than two percent” of all remittances from emigrants.

On top of that, most Salvadorans said they see the move as a “failure,” according to a poll conducted by the University of Central America (UCA) and published last October. The survey revealed that 75.6% of respondents never used cryptocurrency this year, and 77% consider crypto adoption “to have been a failure,” AFP reported citing the survey.