The IMF’s comments came in a statement issued on the conclusion of IMF staff’s 2021 Article IV mission to El Salvador.

IMF staff that visited El Salvador on an official ‘mission’ have issued a report dated November 22, 2021 describing their preliminary findings.

The report said the Salvadorean economy faced certain key risks to its economic outlook including a resurgence of the pandemic worldwide, further increases in borrowing costs due to the tightening of financial conditions, and unaddressed regulatory and supervisory gaps related to the use of Bitcoin. (emphasis added) (The Block)

The report welcomed the efforts by the El Salvador government to improve financial inclusion and stimulate growth through the adoption of bitcoin as legal tender.

However, it said that “risks arising from Bitcoin as a legal tender, the new payments ecosystem and trading in Bitcoin should be addressed.”

It also said that bitcoin should not be used as legal tender in the country because of two risks:

• Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability.
• Its use also gives rise to fiscal contingent liabilities.

Furthermore, the IMF red-flagged the country’s recent proposal to issue sovereign bonds and invest their proceeds in bitcoin. This move, and “the implications of trading more broadly in Bitcoin” needed to be analyzed thoroughly for risks to the country’s financial stability.

The IMF also said that stronger regulation and oversight of the new payment ecosystem should be urgently implemented for consumer protection, anti-money laundering and counter financing of terrorism (AML/CFT), and risk management.

However, the IMF noted that crypto-technologies and digital payment systems like Chivo have the potential to make payments more efficient, thereby enhancing financial inclusion and supporting growth.

Related Story: Bukele Snaps Up 420 More Bitcoin For El Salvador