Bitcoin Should Not Be Legal Tender in El Salvador: IMF – Yahoo Finance


The International Monetary Fund (IMF) said bitcoin should not be used as legal tender in El Salvador and urged the Central American country to strengthen the regulation and supervision of its newly established payment ecosystem.
In a statement published on Monday, the IMF recommended that El Salvador narrow the scope of its Bitcoin Law and mentioned “significant risks” that bitcoin has for consumer protection, financial integrity and financial stability.
The report corresponded with an official IMF visit to El Salvador conducted in accordance with Article 4 of its Constitutive Agreement, which annually overviews the fiscal, monetary and external situation of its members.
The IMF said the announcement of a $1 billion bitcoin-backed bond made by President Nayib Bukele on Saturday was not discussed in joint meetings between government officials and the agency.
Although the IMF’s technical analysis did not include the bond announcement, the financial institution said El Salvador’s plans to buy more bitcoin following the bond issuance, along with increasing its bitcoin exposure, “will require a very careful analysis of implications for, and potential risks to, financial stability.”
According to the IMF, El Salvador’s public debt could escalate beyond 95% of its GDP by 2026 if the country does not implement “strong policy measures” to correct fiscal imbalance and ease constraints on growth. The debt figure did not include the bitcoin bond recently announced, the IMF added.
Among the measures to limit contingent fiscal liabilities, the IMF recommended El Salvador consider winding down the $150 million trust fund created to facilitate the exchange between bitcoin and U.S. dollars. It also recommended withdrawing public subsidies to Chivo Wallet, a digital wallet launched by the Salvadoran government on Sept. 7.
Regarding the country’s new payments ecosystem, the IMF said El Salvador must immediately implement “stronger regulation and oversight.”
It added that the Chivo Wallet should be required to safeguard funds – in U.S. dollars and bitcoin – “by segregating and ring-fencing reserve assets.”
The banking regulation, for its part, should add prudential safeguards such as conservative capital and liquidity requirements related to bitcoin exposure, the IMF added.
El Salvador also must analyze the reporting of bitcoin-related transactions to determine how the cryptocurrency affects the Salvadoran economy and to closely monitor risks, the IMF said.
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El Salvador plans to build the world's first so-called "Bitcoin City."This is the moment when the country's President Nayib Bukele announced the news. Date: November 20, 2021The circular city will be built at the base of the Conchagua volcano in the country's easter region of La Union, where the geothermal energy will power bitcoin mining. (President Nayib Bukele) "It is going to include everything: residential areas, commercial areas, services, museums, entertainment, bars, restaurants…everything devoted to bitcoin." Bukele says the "Bitcoin city" will be built with money from a $1 billion bitcoin-backed bond. Here's what we know about the proposed bond.Bukele said El Salvador plans to issue the bond in 2022. Half of the $1 billion sum would be converted to bitcoin;the other half will be used for infrastructure and bitcoin mining. Samson Mow is the chief strategy officer of blockchain technology Blockstream. He was on stage with Bukele during the announcement and said the bonds will be U.S. dollar-denominated 10-year bonds.They will also carry a coupon of 6.5%.That is well below the 13.5% interest rate yield El Salvador's 10-year bonds are currently trading at.More bitcoin-back bonds are also planned.Mow said he expected other countries to do the same.He also speculated that the moves would absorb enough bitcoin to push up the value of cryptocurrency. That would allow El Salvador to then pay off the bond with profits made from selling the bitcoin again.Crypto exchange Bitfinex was listed as the book runner for the bond. The bonds will be sold in $100 tranches to – quote- "democratize access" to them.They will be able to be traded 24/7 with other assets like stablecoins – another type of digital tokens. That's according to a blogpost from Blockstream.There are a few things that we still don't know about the bitcoin-backed bond.First, it is not known when exactly El Salvador would buy the $500 million worth of bitcoin it sees as crucial to the plan. Second, the legal rights of would-be buyers have also not yet been detailed. Most government bonds are strict legal contracts. That means the government is accountable if the debt is not repaid in full and on time. It is also not known what would happen to the new bonds if the country defaulted on its existing traditional bonds. The government's next bond deadline is an $800 million repayment due in January 2023. That bond is currently trading at a near 20% discount from its face value due to El Salvador's debt problems.The International Monetary Fund, whose help El Salvador is expected to need to ease its problems, has not commented on the "Bitcoin City" bond plan. Earlier in 2021, the IMF said it had both economic and legal concerns about El Salvador making bitcoin legal tender.
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