IMF Doesn't Accept El Salvador Using Bitcoin As A Transaction Tool

JAKARTA - El Salvador, a Latin American country that has adopted Bitcoin as a transaction tool since 2021, has received a warning from the International Monetary Fund (IMF). The IMF urged El Salvador to narrow the application of the Bitcoin law. Julie Kozack, IMF Communications Director, said that discussions with El Salvadoran authorities were ongoing over the risk of using Bitcoin in the country.

For additional information, El Salvador began using Bitcoin as the country's official transaction tool on September 7, 2021. On that date, the Bitcoin law passed by the government of El Salvador, under the leadership of President Nayib Bukele, officially took effect. With this, El Salvador became the first country in the world to adopt Bitcoin as a legal tender, in addition to the US dollar which has been the country's official currency since 2001.

"Taking advantage of the risks arising from the use of Bitcoin is one of the important elements in our talks," Kozack said at a press conference held Thursday, October 3, 2024. He added that the IMF had recommended El Salvador to limit Bitcoin laws, strengthen regulatory frameworks, and closely monitor the cryptocurrency ecosystem.

The IMF also proposes that the involvement of the public sector in the use of Bitcoin be reduced in order to minimize further economic risks. "We are working on reaching an agreement with El Salvador regarding a new program supported by the IMF, which will help stabilize macroeconomics, fiscal adjustments, and reforms to drive economic growth," Kozack said.

These recommendations follow the IMF's statement last August which particularly highlighted El Salvador's fiscal issues, with Bitcoin being one of the focuses of discussion. In the statement, the IMF stated that there was progress in negotiations towards an IMF-backed program.

The proposed policy includes strengthening public finances, increasing bank reserves, improving governance, and reducing the risk of Bitcoin projects. Even so, the IMF warns that the adoption of cryptocurrencies could pose risks to the stability of fiscal and state finances.

According to the IMF, although some risks have not materialized, it together with El Salvador agrees that additional efforts are needed to increase transparency and reduce the potential risk of Bitcoin. Further discussions on this topic are considered crucial.

On the other hand, El Salvador's President, Nayib Bukele, who passed the Bitcoin law, recognizes Bitcoin as a legal currency has received mixed reactions. Bukele said, although domestic adoption is still limited, the overall use of Bitcoin has had a positive impact on El Salvador.