IMF calls on El Salvador to drop Bitcoin as legal tender

“We accept Bitcoin” is announced at a barber shop in Santa Tecla, El Salvador (Salvador Melendez/AP)

The International Monetary Fund wants El Salvador to drop the highly volatile cryptocurrency Bitcoin as legal tender and strictly regulate the electronic wallet the government has pushed adoption of across the country.

The global lender’s board “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status”, the IMF said in a statement.

“The adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability and consumer protection,” the IMF statement said.

President Nayib Bukele led the push to adopt Bitcoin as legal tender alongside the US dollar.

El Salvador’s Legislative Assembly made the country the first to do so in June.

After nearly doubling in value late last year, Bitcoin has plunged and on Tuesday was slightly below where it was when the congress voted June 9.

The Bitcoin law went into effect in September.

From the start there were concerns that a digital currency created to be beyond the control of governments would attract criminal activity.

Mr Bukele promoted the adoption as way for thousand of Salvadorans to avoid money transfer fees when relatives living outside the country sent home remittances.

The Divine Saviour of the World statue towers over the Las Americas Square as the sun rises in San Salvador, El Salvador (Salvador Melendez/AP)

El Salvador’s law called for all businesses, with the technological ability, to accept Bitcoin as payment.

The rollout was glitchy, but seems to have smoothed out.

Mr Bukele became a darling of the cryptocurrency’s promoters and has since spoken of building a Bitcoin city and issuing Bitcoin-backed bonds, something else some IMF directors expressed concern over.

Mr Bukele’s office said it did not immediately have a comment on the IMF’s statement.

El Salvador’s treasury minister Alejandro Zelaya, however, noted the IMF’s agreement that boosting financial inclusion was important and that an e-wallet could help, to which he added via Twitter: “It appears to work for financial inclusion, but you mustn’t do it.

“The future waits for no one. #Bitcoin.”

The IMF did commend Mr Bukele’s government on its management of the Covid-19 pandemic.

The country is currently experiencing a surge in infections, but it was aggressive in vaccinating the population and kept a relatively low death toll.

It also noted that the economy was projected to grow 10% in 2021 after contracting 7.9% the year before.

The board did see other problems on the horizon, however, if the government does not tighten up its spending.

“Persistent fiscal deficits and high debt service are leading to large and increasing financing needs,” the statement said.

“Under current policies, public debt is expected to rise to about 96% of GDP in 2026 on an unsustainable path.”