El Salvador has gone too far on bitcoin, says IMF

The IMF recognizes that the crypto wallet set up in El Salvador can lead to better financial inclusion. However, the institution believes that the country should not have gone so far as to give bitcoin legal tender, and it invites El Salvador to backtrack.

The global moneymaker is still unconvinced by El Salvador’s bitcoin law. The country, under the impetus of its president Nayib Bukele, gave bitcoin the status of legal tender (alongside the dollar). And the International Monetary Fund (IMF) did not hide the many doubts it has about this strategy in a press release published on January 25, 2022.

Certainly, the use of a cryptocurrency such as bitcoin can promote financial inclusion in a country like El Salvador, agrees the IMF. This was one of the main arguments given by Nayib Bukele to justify his Bitcoin law. A majority of the population of El Salvador (70%) does not have a bank account. Bitcoin, which only requires a simple digital wallet, is therefore practical in this respect.

Bitcoin has become legal tender in El Salvador. // Source: Executium / Unsplash

The Chivo crypto wallet can have a positive impact

IMF directors acknowledge that the Chivo crypto wallet — which the government has made available to its people — could facilitate digital payment and thereby help “ to better financial inclusion “. The International Monetary Fund has, however, stressed the need to better regulate the use of this portfolio.

But what really troubles the IMF is that Savaldor made bitcoin an official currency. The state did not just facilitate the use of this cryptocurrency in the country: it made it legal tender. Bitcoin is not the only currency with legal tender in El Salvador (the dollar had, and retains this status), but this title is a very special status, which no other country has granted to a cryptocurrency for the moment. This means, among other things, that Salvadorans have the possibility of paying their taxes in bitcoin and that businesses can display prices in this currency. Giving Bitcoin legal tender is therefore an action that has a strong impact on the entire economy of the country.

Deprive bitcoin of its status as an official currency

The IMF believes that El Salvador should not have gone so far with bitcoin. The institution believes that the use of bitcoin poses significant risks to financial stability, financial integrity and consumer protection “. The IMF urged in its statement authorities [du Salvador] reduce the scope of the bitcoin law by removing the legal status of bitcoin “.

The International Monetary Fund had already expressed its reservations last summer on the El Salvador project. “ If goods and services are priced in both real currency and cryptocurrency, individuals and businesses will spend a lot of time and resources figuring out which currency is most profitable to hold, instead of devote it to production activities. »

The price of bitcoin has fallen

If government revenues and expenditures are in different currencies (for example, if Salvadorans decide to pay most of their taxes in bitcoin, but government expenditures are in dollars or vice versa), variations in currency exchange rates could put the State (and therefore the population) in a complex situation, the IMF also pointed out in July.

The institution finally warned of the risk that the volatility of crypto-currencies could pose to El Salvador. This volatility is particularly palpable right now. The central banks of various countries, notably the FED in the United States, are about to raise interest rates to fight against inflation. This shift will favor savings, to the detriment of investment, since it will become more expensive to borrow money. In this context, investors tend to fall back on low-risk bets. Result ? The prices of many cryptocurrencies have plummeted since early January. Bitcoin in particular had fallen to €29,653 on January 24. That’s half what it was worth in mid-November.

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