IMF urges El Salvador to remove bitcoin’s status as legal tender

The International Monetary Fund’s (IMF) executive board on Tuesday warned El Salvador against moving to make bitcoin a legal tender and called for “strict regulation and oversight of the new ecosystem,” according to the board’s statement.

“They [the board members] stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities,” the statement read. “They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. Some Directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.”

The statement was released after the board’s yearly conference.

The nation in September became the first to adopt the cryptocurrency as a legal tender, which required businesses to accept bitcoin as a legal payment. 

The move prompted the IMF board to repeatedly recommend that El Salvador reverse the decision, citing concerns over the economy and legal issues. In addition, some members expressed concern about the “risks associated with issuing Bitcoin-backed bonds,” the statement said.

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

The board noted the importance of “boosting financial inclusion,” adding that other digital forms of payment, such as the Chivo e-wallet, could take that role.

The country is preparing to issue $1 billion in bonds, half of which would be used to purchase bitcoin, to an area in the eastern region of La Union, with plans to create the world’s first “Bitcoin City,” according to Reuters. The government predicts that the exposure will attract investors who would receive a dollar yield of 6.5 percent, much lower than the roughly 17 percent that the market currently prices for similar Salvadoran government debt, the wire service reported. 

However, under current policies, the IMF warned that the debt could rise to about 86 percent gross domestic product in 2026 and called it an “unstable path.”