El Salvador buys 410 Bitcoins post crypto crash, IMF warns it of the financial risks
India Today
Bitcoin has seen a massive price drop since its peak market value in November. While El Salvador is optimistic about its decision to bring it to use as an official currency, the International Monetary Fund warns the country of the "large risks" associated with the idea.
Just as El Salvador increased its Bitcoin balance following the crypto crash, the International Monetary Fund has once again warned the country of risks linked to its pro-Bitcoin approach. The international financial body “urged” El Salvador to drop the legal status it has granted to Bitcoin and highlighted the need for "strict regulation and oversight" of its new e-wallet Chivo and Bitcoin.
In its conclusion of 2021 Article IV consultation with El Salvador, the IMF noted that the adoption of a cryptocurrency as legal tender brings "large risks" to the country's economy. These risks were found to be specific to "financial and market integrity, financial stability, and consumer protection." The adoption of cryptocurrencies could also bring liabilities to the country in the future, the IMF warned.
The assessment follows El Salvador's move in September 2021 to adopt Bitcoin as legal tender. Since then, the country has amassed at least 1,801 bitcoins as per figures by Bloomberg. Just last week, El Salvador President Nayib Bukele announced on Twitter that the country had purchased 410 Bitcoin for a total of $15 million. “Some guys are selling really cheap,” Bukele wrote in his tweet mentioning the purchase.
El Salvador's purchase followed a massive crash in cryptocurrency prices that saw Bitcoin trade at around half of its peak value in November 2021. That is why the Salvadorian President noted it to be a good deal. If or when cryptocurrencies regain their market value in the time to come, this investment will surely pay off in a big way for El Salvador.
However, the very crash that makes it a good deal is a monumental warning of what IMF assessed. It is easy to see how the global financial watchdog is right in pointing out that cryptocurrencies are very volatile in value, and such market crashes can instantly bring down the economy of a region dependent on crypto. It thus shared certain measures to mitigate that in its report.
Although acknowledging the importance of "boosting financial inclusion" through e-wallets like Chivo, IMF called for strict regulation of the space. In its report, IMF urged El Salvador "to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status." This means that the board suggests it not be used as an official currency for financial obligations like payment of a debt, tax payments, contracts, or legal fines.
In addition, some Directors of the Executive Board also pointed out the risks associated with issuing Bitcoin-backed bonds. This is another use-case for cryptocurrencies that Bukele is bringing to use in the country. The country has already planned the world's first Bitcoin city, which will be backed by these Bitcoin bonds.
