IMF Report on El Salvador’s Bitcoin Adoption: Risks Averted, but Transparency Needed

According to a recent mission statement released by the International Monetary Fund (IMF), El Salvador has adopted bitcoin as legal tender and has avoided risk so far. The IMF says the risks did not materialize due to the limited use of bitcoin. However, the UN financial agency warns that if its legal tender status is growth-friendly, it could pose risks to the country’s “financial integrity and stability”.

IMF Discusses Legal Tender Status of Bitcoin in El Salvador: Limited Use Prevents Risks, But Rise May Raise Concerns

On February 10, 2023, the International Monetary Fund (IMF) published final mission statement regarding El Salvador and its economy. The IMF visited San Salvador from January 30 to February 8 for consultations on Article IV 2023. The IMF statement discusses the adoption of bitcoin in El Salvador and says that “risks must be considered.” The IMF now admits that the risks it raised in 2021 have largely been avoided.

“While the risks have yet to materialize due to the limited use of bitcoin, as surveys and remittance data show, its use could increase given its status as legal tender and new legislative reforms to encourage the use of crypto assets, including tokenized bonds (Digital Assets ). rights),” the IMF researchers specify. “In this context, major risks to financial integrity and stability, financial soundness and consumer protection remain, and the 2021 Article IV recommendations remain in place.”

El Salvador declared bitcoin legal tender in September 2021 and growth has been sluggish since then. The country regularly invested bitcoins and added them to its treasury. However, the IMF is highlighting the need for greater transparency in government purchases of bitcoin and the government-owned Chivo wallet. “Greater transparency regarding the government’s bitcoin transactions and the financial health of the state-owned bitcoin wallet (Chivo) is critical, especially in assessing major financial contingencies and counterparty risks,” the agency noted.

In addition to the risks associated with bitcoin, the slow pace of its adoption and adverse economic shocks, El Salvador’s economy grew rapidly last year, according to the IMF. The IMF estimates that the economy grew by 2.8% in 2022. Amid growing economic vulnerabilities in 2022, the IMF claims El Salvador’s Treasury still has no access to international capital markets.

The IMF identifies two main problems that the El Salvadoran government can address: implementing more effective anti-money laundering/terrorist financing (AML/CFT) policies and improving financial transparency.

What do you think about the recommendations of the IMF on financial stability and the integrity of the country? Let us know what you think about it in the comments section below.

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