The International Monetary Fund is urging El Salvador to drop its controversial embrace of bitcoin as its legal tender, saying it “entails large risks” for the Central American nation’s economy.
The IMF made the recommendations after it held negotiations with El Salvador — whose government is asking for a $1.3 billion loan to help pay down its debt.
The IMF said El Salvador — which in September became the first country in the world to adopt bitcoin as legal tender alongside the US dollar — is on an “unsustainable path.”
The IMF’s executive board said El Salvador’s bitcoin embrace poses fresh risks to the nation’s “financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.”
If current policies hold, the nation’s economy will be saddled with public debt equal to 96% of GDP by 2026, according to the world body.
El Salvador President Nayib Bukele has been vocal in touting crypto on social media. Last Friday, the 40-year-old Bukele posted a message on Twitter announcing that his government purchased 410 bitcoins valued at $15 million. The president bragged that he managed to buy the currency “really cheap” — particularly after the crypto market took a beating last week.
Bitcoin fell by about 50% from its record high in November. As of Tuesday morning, it recovered somewhat. The value of one bitcoin rose by more than 3% to $38,230.20.
Bukele reacted to the sharp dip by posting a meme photo showing him in a McDonald’s employee uniform — part of an internet joke in which crypto holders discuss their future careers if the value of the currency tanks.
El Salvador’s digital currency portfolio is said to total more than 1,500 bitcoins — or $57 million. Bukele has defended the decision to adopt bitcoin as a necessary tool to help integrate 70% of the country’s population into the financial system.
El Salvador’s adoption of bitcoin coincided with its roll-out of its virtual wallet Chivo, which offers no-free transactions. Chivo also makes it convenient for Salvadorans to accept remittances from its nationals who are living and working abroad.
But many Salvadorans have reported instances of identity theft in which hackers use personal data to break into others’ e-wallets and claim the free $30 worth of bitcoin offered by the government.
In its statement on Tuesday, the IMF praised Chivo as a concept that could “boost financial inclusion” though it added that the government needs to impose “strict regulation and oversight.”