The International Monetary Fund (IMF) Tuesday called on El Salvador to drop the highly volatile cryptocurrency Bitcoin as legal tender and strictly regulate the electronic wallet the government has pushed across the country, citing “large risks” posed by the cryptocurrency.
The Latin American country in September became the first country in the world to embrace digital money, allowing consumers to use it in all transactions, alongside the United States dollar.
The call by the Washington-based crisis lender came as the cryptocurrency dropped in value amid wider volatility on Wall Street in recent days, undoing much of the gains it had made during a record-setting climb in value last year.
The IMF staff had previously called on El Salvador’s President Nayib Bukele to reconsider putting Bitcoin at the center of his country’s finances.
The latest pronouncement used much stronger language and came from the IMF’s board, which is comprised of representatives of member governments, including the United States.
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.
They “stressed that there are large risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection” and with issuing Bitcoin-backed bonds.
In response, El Salvador’s Treasury Minister Alejandro Zelaya 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.”
Bitcoin was trading at about $37,000 on Tuesday, having lost about half its value compared to the record of $67,734 hit in November.
It fell to its lowest point since July on Monday, dipping below $33,000 before recovering.
Bitcoin shot up in value in 2021 as Wall Street showed a growing appetite for cryptocurrency, while Tesla boss Elon Musk’s controversial tweets about the digital assets helped the market rise and fall alike.
The trend was not lost on Bukele, who was elected in 2019 with promises to fight organized crime and improve security in his violence-wrecked country.
His move last September to legalize Bitcoin in El Salvador drew worldwide attention and sparked protests on the streets of the capital San Salvador that were also over his administration’s judicial reforms, which critics said threaten democracy.
Thousands took to the streets carrying signs reading “No to Bitcoin” and at one point burning one of the Bitcoin ATMs that had been installed nationwide.
They didn’t appear to deter Bukele, who announced in November plans to build the world’s first “Bitcoin City,” powered by a volcano and financed by $1 billion cryptocurrency bonds.
His administration had also taken advantage of price drops to buy digital assets for the country.
No IMF enthusiasm
The IMF was wary of the cryptocurrency’s adoption from the start, with spokesperson Gerry Rice saying before Bukele made the move official, “Adoption of Bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis.”
In Tuesday’s statement from the board, they noted the fund supports the aim of “boosting financial inclusion,” which could be advanced using the country’s “Chivo” e-wallet but warned about the high levels of volatility in the cryptocurrency’s exchange rate.
Bitcoin’s value has shown some correlation with Wall Street equities, but pressure has also come from China’s crackdown on the trading and mining of cryptocurrencies and also the risk of wider regulatory action from the likes of Europe and the U.S.
Analysts also say it faces increased competition in 2022 from rival digital assets like Ethereum.