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  • Writer's pictureConnie Chan

El Salvador Bitcoin Risks ‘Have Not Materialised’ Says IMF But Warns Against Expanding Exposure

In September 2021, El Salvador made history by becoming the first country in the world to adopt Bitcoin as a legal tender alongside the US dollar. While the decision sparked controversy and attracted global attention, it also raised concerns about the potential risks of such a move.

The International Monetary Fund (IMF) recently released a report detailing the risks and implications of El Salvador’s Bitcoin adoption, acknowledging that some risks have not yet materialized, but warning against expanding exposure to the cryptocurrency.

In this article, we will delve deeper into the IMF’s findings and examine the potential risks and benefits of El Salvador’s groundbreaking decision.

El Salvador Bitcoin Risks ‘Have Not Materialised’

El Salvador, the first country to officially recognize bitcoin as legal tender, has been cautioned by the International Monetary Fund (IMF) regarding the potential risks associated with its growing reliance on digital currency. While acknowledging that the risks of bitcoin adoption “have not materialized” due to its limited use, the IMF has urged El Salvador to exercise caution and pay close attention to the transparency and integrity of its financial system.

IMF Calls for Increased Transparency and Caution as El Salvador Faces Bitcoin Adoption Risks?

On February 10, the International Monetary Fund (IMF) issued a report on El Salvador’s adoption of bitcoin, stating that while the risks associated with the digital currency have not yet materialized, there is still a need for transparency and caution. The report was compiled by a team of specialists who visited the Central American country, and it highlights the importance of addressing the potential risks that bitcoin poses to El Salvador’s economic strength, consumer protection, financial integrity, and stability.

The IMF cautioned El Salvador against its proposal to issue tokenized bonds and recommended that it should be avoided due to legal and financial risks. The statement also advised the authorities to reconsider their plan to increase government exposure to Bitcoin through tokenized bonds, citing concerns about the legal risks, budgetary fragility, and speculative nature of the crypto market.

In addition, the IMF emphasized the need for the Salvadoran government to increase transparency around its Bitcoin transactions and provide a clearer picture of the financial state of its state-owned Bitcoin wallet, the Chivo wallet. This increased transparency is particularly important given El Salvador’s decision to adopt Bitcoin as a legal currency in September 2021 and underscores the importance of fully understanding the associated risks.

El Salvador’s Adoption of Bitcoin as Legal Tender: What You Need to Know

In September 2021, El Salvador’s President Nayib Bukele declared Bitcoin as a legal tender, alongside the US dollar. The tech-savvy President spearheaded this move to encourage more Salvadorans, particularly those who are unbanked, to participate in the country’s formal economy. As a result, all businesses in El Salvador, including small shops in rural areas, are required to accept Bitcoin as a form of payment.

In addition, last month El Salvador’s Congress passed laws regulating the issuance of digital assets by the state and commercial enterprises. President Nayib Bukele also tweeted about a series of transactions totaling around 2,380 bitcoin before mid-November, when he announced that the Treasury would buy one bitcoin per day. However, the investment has since lost over 50% of its value, representing a paper loss of over $26 million.

Furthermore, on January 11, a legal framework was established for El Salvador’s “Volcano bond,” a Bitcoin-backed bond that the Salvadoran government plans to use to reduce the nation’s debt and fund the development of its “Bitcoin City.”

However, the IMF has warned that El Salvador’s increasing reliance on bitcoin could make the country more susceptible to money laundering and other illicit activities that could pose a threat to its overall stability. Given the legal risks, the IMF urged the authorities to reconsider their plans to increase government exposure to bitcoin.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.


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