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Friday, 03 December, 2021

Crypto wrap: IMF warns El Salvador against using bitcoin as legal tender

Soon after El Salvador's President Nayib Bukele announced plans for the world's first Bitcoin city, powered by a volcano and financed by cryptocurrency bonds, the International Monetary Fund (IMF) recommended that the country stop using Bitcoin as legal tender, citing financial and consumer risks associated with the cryptocurrency. El Salvador, which has relied on the US dollar as its principal currency for more than two decades, legalized Bitcoin as an official money in September and has reaped the benefits.

The IMF noted in a statement that Bitcoin and cryptocurrencies in general might help with efficient payments, but that making them legal money would likely jeopardize financial stability. "Because of Bitcoin's tremendous price volatility, it poses major threats to consumer protection, financial integrity, and financial stability if it is used as legal money. It also creates fiscal contingent liabilities as a result of its use. Bitcoin should not be utilized as a legal tender because of these hazards. The staff proposes restricting the scope of the bitcoin law and bolstering the new payment ecosystem's regulation and oversight "In a statement, the IMF added.

El Salvador's Bitcoin law should be narrowed, and the new payment ecosystem's regulation and oversight should be strengthened, according to the international organization. El Salvador aims to establish the world's first "Bitcoin City," first funded by Bitcoin-backed bonds, according to President Nayib Bukele, who is doubling down on his bet that the cryptocurrency will stimulate investment in the Central American country. Bukele claimed the city planned in the eastern district of La Union would obtain geothermal electricity from a volcano and would not collect any taxes except the value-added tax during an event that wrapped up a week-long promotion of Bitcoin in El Salvador (VAT). Before requesting IMF funding, the IMF often sends Article IV missions to member nations to confer with government leaders.

"The intentions to issue sovereign bonds and use the profits to acquire Bitcoin and fund infrastructure initiatives revealed on November 20 took place after the mission's technical work was completed and were not discussed with the authorities," the IMF confirmed. This isn't the first time the IMF has issued a warning to the Latin American country for adopting Bitcoin. When El Salvador approved its historic Bitcoin Law earlier this year, the IMF had an anticipated reaction of criticizing its chances. Despite several warnings about the dangers of a Bitcoin-based financial system, El Salvador has gone forward with its plan. To enable everyday transactions and remittance transfers in Bitcoin, the country has introduced its Chivo Wallet app, which is powered by Bitcoin, as well as several ATMs.

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