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Bitcoin Should Not Be Legal Tender in El Salvador: IMF

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The International Monetary Fund (IMF) said bitcoin should not be used as legal tender in El Salvador and urged the Central American country to strengthen the regulation and supervision of its newly established payment ecosystem.

In a statement published on Monday, the IMF recommended that El Salvador narrow the scope of its Bitcoin Law and mentioned “significant risks” that bitcoin has for consumer protection, financial integrity and financial stability.

The report corresponded with an official IMF visit to El Salvador conducted in accordance with Article 4 of its Constitutive Agreement, which annually overviews the fiscal, monetary and external situation of its members.

The IMF said the announcement of a $1 billion bitcoin-backed bond made by President Nayib Bukele on Saturday was not discussed in joint meetings between government officials and the agency.

Although the IMF’s technical analysis did not include the bond announcement, the financial institution said El Salvador’s plans to buy more bitcoin following the bond issuance, along with increasing its bitcoin exposure, “will require a very careful analysis of implications for, and potential risks to, financial stability.”

According to the IMF, El Salvador’s public debt could escalate beyond 95% of its GDP by 2026 if the country does not implement “strong policy measures” to correct fiscal imbalance and ease constraints on growth. The debt figure did not include the bitcoin bond recently announced, the IMF added.

Among the measures to limit contingent fiscal liabilities, the IMF recommended El Salvador consider winding down the $150 million trust fund created to facilitate the exchange between bitcoin and U.S. dollars. It also recommended withdrawing public subsidies to Chivo Wallet, a digital wallet launched by the Salvadoran government on Sept. 7.

Regarding the country’s new payments ecosystem, the IMF said El Salvador must immediately implement “stronger regulation and oversight.”

It added that the Chivo Wallet should be required to safeguard funds – in U.S. dollars and bitcoin – “by segregating and ring-fencing reserve assets.”

The banking regulation, for its part, should add prudential safeguards such as conservative capital and liquidity requirements related to bitcoin exposure, the IMF added.

El Salvador also must analyze the reporting of bitcoin-related transactions to determine how the cryptocurrency affects the Salvadoran economy and to closely monitor risks, the IMF said.