El Salvador is Urged by the IMF to Address Bitcoin's Risks

The IMF (International Monetary Funds) has warned El Salvador, the only government to recognize bitcoin as legal tender, about the dangers of increasing its reliance on the digital currency.

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The warning was issued in a report released on Friday following a visit of specialists to the Central American nation.

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It was found that last year's growth in El Salvador was "vigorous," but problems such as the bitcoin connection continued.

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El Salvador adopted bitcoin as legal money alongside the US dollar in September 2021.

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President Nayib Bukele, who is digitally savvy, backed the initiative to bring more Salvadorans, the majority of whom do not have bank accounts, into the formal economy.

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The amendment mandated that all companies in El Salvador, even tiny retailers, accept bitcoin as payment.

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However, the IMF and World Bank cautioned that doing so might increase the country's susceptibility to money laundering and other unlawful activity, which could endanger the country's fundamental stability.

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"While issues have not yet emerged as a consequence of bitcoin's limited use to date," the study adds, "its use may expand as a result of future legislation revisions that encourage the use of crypto assets."

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In this aspect, "underlying concerns to financial integrity and stability, fiscal sustainability, and consumer protection exist," it was stated.

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According to the IMF's specialists, "It is "crucial" that Salvadoran authorities give "more transparency over the bitcoin transactions and the financial status of the state-owned bitcoin wallet known as Chivo." Given the legal dangers, budgetary fragility, and predominantly speculative nature of crypto markets, the authorities should reconsider their intentions to increase government exposure to Bitcoin "said in the study.

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The Salvadoran economy increased by 2.8% in 2022, which attributes the growth to the government's excellent response to the Covid-19 epidemic, "the remarkable reduction in crime, and robust remittances and tourism income."

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The IMF cautioned, however, that a substantial downturn in the United States might harm exports and remittances.