El Salvador boosted its Bitcoin balance following the crypto crisis, and now, just as El Salvador is increasing its Bitcoin balance, the International Monetary Fund has once again cautioned the government of the dangers associated with its pro-Bitcoin stance. The International Monetary Fund “urged” El Salvador to withdraw the legal status it had granted to Bitcoin and stressed the importance of “tight supervision and oversight” of the country’s new e-wallet Chivo as well as of Bitcoin in general.
The International Monetary Fund (IMF) stated in the conclusion of its 2021 Article IV consultation with El Salvador that the introduction of Bitcoin as legal cash poses “significant risks” to the country’s economy. This group of hazards was deemed to be particular to “financial and market integrity, financial stability, and consumer protection,” according to the study. The International Monetary Fund (IMF) has cautioned that the use of cryptocurrencies might result in liabilities for the government in the future.
The evaluation comes in the wake of El Salvador’s decision to legalize Bitcoin as legal cash in September 2021. Approximately 1,801 bitcoins have been amassed by the country since then, according to Bloomberg data. President Nayib Bukele of El Salvador stated on Twitter only last week that the nation had acquired 410 Bitcoins for a total of $15 million, according to Reuters. “Some individuals are selling incredibly cheap,” Bukele remarked in a tweet about the transaction, which was later deleted.
In the aftermath of a huge drop in cryptocurrency values, which saw Bitcoin trade for less than half of its high value in November 2021, El Salvador made the purchase. It is for this reason that the President of El Salvador described it as a good bargain. If and when cryptocurrencies regain their market value in the future, this investment will almost certainly pay off handsomely for the country of El Salvador in the long run.
However, the very crash that makes it a wonderful deal also serves as a massive warning about the IMF’s assessment of the situation. One can easily understand why the global financial watchdog is correct in stating that cryptocurrencies are extremely volatile in value and that such market crashes may rapidly knock the economy of an area that is heavily reliant on cryptocurrency to its knees. As a result, it included in its report a number of mitigation strategies.
Despite recognizing the necessity of “increasing financial inclusion” through e-wallets such as Chivo, the International Monetary Fund (IMF) recommended rigorous regulation of the area. The International Monetary Fund (IMF) recommended that El Salvador “reduce the scope of the Bitcoin law by eliminating Bitcoin’s legal cash status.” This indicates that the board of directors recommends that it not be utilized as an official currency for financial responsibilities such as debt repayment, tax payments, contracts, or legal fines and penalties.
In addition, several members of the Executive Board have raised concerns about the dangers involved with the issuance of Bitcoin-backed bonds, which are now under consideration. This is just another use of the cryptocurrency that Bukele is bringing to the country’s attention. The nation has already announced plans to build the world’s first Bitcoin city, which would be financed entirely by the sale of these Bitcoin bonds.
When announcing his intentions in November of last year, Bukele stated that the VAT collected by the city will be used in part (half) to support the bonds issued to construct the city, which he described as “a long-term investment.” The remaining half of the tax revenue will be used to pay for services such as rubbish collection. Approximately 3,00,000 Bitcoins, according to Bukele, is the approximate total cost of the city’s public infrastructure.
It remains to be seen if El Salvador’s decision to embrace Bitcoin will pay off in a significant way. Until recently, El Salvador has used the earnings from its Bitcoin purchases to fund the development of 20 ‘Bitcoin Schools’ and other similar initiatives. If this trend continues, the country will undoubtedly serve as a case study for the rest of the globe, and Bukele will be correct in his forecast that fiat money will be rendered obsolete.
