The International Monetary Fund (IMF) recently urged El Salvador to remove Bitcoin as legal tender status from its economy.
El Salvador was the first country in the world to adopt Bitcoin as a legal tender on 7 September 2021. This was a monumental event as it saw Bitcoin and cryptocurrency as having real-world utility, albeit experimental. El Salvador’s economic trouble was accelerated after COVID-19 and the government proposed to adopt Bitcoin to curb inflation. Additionally, El Salvador relies on remittances from expatriates sending money back to El Salvador. Bitcoin created an opportunity for individuals to send payments with minimum fees. However, the IMF believes that the adoption of Bitcoin carries new and larger risks for El Salvador’s financial stability, market integrity, and consumer protection.
Most importantly, the IMF noted that Bitcoin was not a be-all-end-all solution to El Salvador’s economic issues. El Salvador needs to introduce new structural reforms to boost inclusive growth, reduce crime, reduce energy costs, and increase infrastructure and social spending (specifically for education and health). When looking at Bitcoin, the IMF highlighted that it is possible that emerging digital payment solutions could play a role in reducing the countries public debt but there are no concrete regulations in place to manage cryptocurrency. Without a sound legislative framework, the IMF is encouraging El Salvador to remove Bitcoin from legal tender status.
What is clear is that the IMF, and many countries around the world, understand Bitcoin and cryptocurrencies utility, but are hesitant to introduce them as legal tender without regulatory reform. Cryptocurrency is emerging as a new asset that cannot be controlled by current securities law. What the IMF has inadvertently emphasised is that regulatory reform is necessary before cryptocurrency can integrate itself with current economies and financial systems.