On Monday, the International Monetary Fund criticized El Salvador's decision to make Bitcoin legal tender due to a variety of concerns about the cryptocurrency's safety.
The IMF devoted an entire section of its report on El Salvador, which praised the country's response to the pandemic, to discussing Bitcoin and the government-backed Chivo wallet introduced when the cryptocurrency became legal tender.
The fund didn't mince words in that section of the report. It said:
Crypto-technologies and digital payment systems like Chivo have the potential to make payments more efficient, thereby enhancing financial inclusion and supporting growth. Given Bitcoin's high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender. Staff recommends narrowing the scope of the Bitcoin law and urges strengthening the regulation and supervision of the new payment ecosystem.
It said, "stronger regulation and oversight of the new payment ecosystem should be immediately implemented for consumer protection, anti-money laundering and counter financing of terrorism (AML/CFT), and risk management" as well.
The fund also criticized El Salvador President Nayib Bukele's plan to issue a $1 billion "bitcoin bond," half of which would be used to purchase more Bitcoin, although it was quiet on Bukele's plan to use the other half to buy additional mining equipment.
The IMF's message to El Salvador was clear: Stop investing so much in Bitcoin. Given the plans to build an entire Bitcoin City and devote significant amounts of energy to mining the cryptocurrency, however, that warning seems likely to fall on deaf ears.
