According to a recent mission statement released by the International Monetary Fund (IMF), El Salvador has adopted bitcoin as legal tender and has thus far avoided risk. The IMF claims that the risks have not materialized due to the limited use of bitcoin. However, the United Nations financial agency warns that if its legal tender status spurs growth, it could pose risks to the country’s “financial integrity and stability.”
IMF Discusses Bitcoin’s Legal Tender Status in El Salvador: Limited Use Avoids Risk, But Growth Could Raise Concerns
On February 10, 2023, the International Monetary Fund (IMF) published a final mission statement about El Salvador and its economy. The IMF visited San Salvador from January 30 to February 8 for the 2023 Article IV consultation. In the statement, the IMF discusses bitcoin adoption in El Salvador, stating that “risks must be addressed.” The IMF now acknowledges that the risks it posed in 2021 have been mostly avoided.
“While the risks have not materialized due to the limited use of bitcoin so far, as suggested by survey and remittance data, its use could grow given its status as legal tender and new legislative reforms to encourage use. of crypto assets, including tokenized bonds (Digital Assets Law)”, detail the IMF researchers. “In this context, underlying risks to financial integrity and stability, fiscal sustainability, and consumer protection persist, and the 2021 Article IV recommendations remain valid.”
El Salvador declared bitcoin legal tender in September 2021 and since then growth has been slow. The country has made regular investments in bitcoin and added it to its treasury. However, the IMF stresses the need for more transparency in government bitcoin purchases and the state-owned Chivo wallet. “Greater transparency regarding government bitcoin transactions and the financial status of the state-owned bitcoin wallet (Chivo) is crucial, particularly to assess underlying tax contingencies and counterparty risks,” the agency noted.
In addition to the risks associated with bitcoin, its slow adoption and adverse economic impacts, the Salvadoran economy grew rapidly last year, according to the IMF. The IMF estimates that the economy expanded by 2.8% in 2022. Amid growing economic vulnerabilities in 2022, the IMF asserts that the Salvadoran Treasury still lacks access to international capital markets.
The IMF identifies two main issues that the Salvadoran government could address: implementing better anti-money laundering/combating the financing of terrorism (AML/CFT) policies and increasing fiscal transparency.
What do you think about the IMF recommendations for the stability and financial integrity of the country? Let us know what you think about this topic in the comments section below.
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