(Kitco News) The International Monetary Fund (IMF) has warned El Salvador about the risks of the country’s exposure to bitcoin and called for more transparency.
El Salvador became the first country to adopt Bitcoin as legal tender in 2021. The country then went on a Bitcoin buying spree, but the government was unclear on how much Bitcoin it has bought.
Based on President Nayib Bukele’s tweets, El Salvador acquired 2,381 bitcoins, but that doesn’t count Bukele’s promise in November to buy one bitcoin every day starting November 18.
There is no official record of how much El Salvador has purchased so far. Reuters estimated that the country bought around 2,470 bitcoins for around $106.4 million.
After a visit to the country, the IMF highlighted the risks associated with the country’s exposure to cryptocurrency, calling on El Salvador to address them.
“Although the risks have not materialized due to the limited use of Bitcoin so far – as survey and remittance data suggest – its use could grow given its legal tender status and the new legislative reforms to encourage the use of crypto assets, including tokenized bonds (Digital Assets Act),” the missions final statement said on Friday.
Last month, El Salvador passed a law to regulate the issuance of other digital assets. El Salvador’s Congress voted the digital asset issuance billwhich allows the country to issue the first series of “volcano bonds” to repay foreign debt and create the investment paradise “Bitcoin City”.
“Underlying risks to financial integrity and stability, fiscal sustainability, and consumer protection persist,” the IMF statement said.
The IMF has also called for greater transparency from El Salvador as there is a lot of uncertainty. “Greater transparency on government Bitcoin transactions and the financial condition of the state-owned Bitcoin wallet (Chivo) remains critical, particularly to assess underlying fiscal contingencies and counterparty risks,” notes the press release.
Funding Bitcoin purchases by issuing token securities should be avoided due to fiscal risks, the IMF stressed, adding that El Salvador should reconsider adding more exposure to Bitcoin.
“Given the legal risks, fiscal fragility, and largely speculative nature of crypto markets, authorities should reconsider their plans to expand government exposures to Bitcoin, including by issuing token bonds. The use of the produced by the new Bitcoin fund management should follow regular expenditure controls and good governance practices,” the IMF statement said.
At the time, the IMF praised El Salvador’s growth of 2.8% last year, pointing to “the unprecedented reduction in crime, as well as remittances and income from tourism”.
Bukele has come under public criticism for his choice to diversify into Bitcoin – a move that has not been popular with his citizens.
One of Bukele’s main arguments for adopting Bitcoin was to allow his people to save on bank fees when receiving or transferring money from abroad, especially to and from the United States. Remittances accounted for more than a quarter of El Salvador’s GDP. However, a year later, the Salvadoran Central Bank said Bitcoin still represented “less than two percent” of all remittances from emigrants.
On top of that, most Salvadorans said they considered the decision a “failure”, according to a poll conducted by the University of Central America (UCA) and published in October last year. The survey found that 75.6% of respondents have never used cryptocurrency this year, and 77% consider crypto adoption “to have been a failure”, AFP reported citing the ‘investigation.
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