Bitcoin as Legal Tender: IMF warns El Salvador

The International Monetary Fund (IMF) has urged El Salvador against using Bitcoin as legal currency because of the potential risks associated with cryptocurrencies.

The warning came only one day after Salvadoran President Nayib Bukele proclaimed his ambition to construct a “Bitcoin City” powered by a volcano and funded with Bitcoin bonds.

Mr. Bukele told a raucous gathering in Mizata, a beach community, that the projected new city will “have everything.” 

He said, 

“Everything is devoted to Bitcoin. Everything is devoted to Bitcoin, from homes and businesses to services, museums, and entertainment venues, to bars and restaurants, to the airport, port, and train.”

While wearing a baseball cap backward, President Obama stated that the city will have no personal income tax and just a value-added tax going forward (VAT). 

The IMF warned El Salvador on Monday not to use Bitcoin as legal tender because of the many risks associated with it.

This is the first nation in the world to accept Bitcoin as a kind of legal currency in addition to the US dollar, which El Salvador has been using for the last two decades. 

The country’s Bitcoin legislation entered into force in September. El Salvador’s President Nayib Bukele said that his country has also acquired 1,120 bitcoins.

The International Monetary Fund (IMF) dispatches Article IV missions to member nations before seeking the use of IMF resources. According to the International Monetary Fund (IMF), 

“The recognition of Bitcoin as legal money, the regulation and supervision of Bitcoin service providers, and the e-wallet Chivo were also evaluated.”.

According to the International Monetary Fund’s “Staff Concluding Statement of the 2021 Article IV Mission” for El Salvador: “The use of Bitcoin as legal money implies considerable risks to consumer protection, financial integrity, and financial stability because of its extreme price volatility. In addition, its usage might result in financial problems. Bitcoin should not be utilized as legal money because of these hazards.”

The International Monetary Fund (IMF) then encouraged El Salvador to “limit the scope of the Bitcoin legislation” and to increase “control and supervision of the new payment ecosystem.” President Bukele’s announcement of intentions to build the world’s first Bitcoin city, fueled by a volcano and funded with Bitcoin bonds, came only one day before the IMF’s statement. 

According to him, there would be no taxes in Bitcoin City save for the value-added tax (VAT).

Verified by the IMF

“The intentions to issue sovereign bonds and use the profits to buy bitcoin and fund infrastructure plans revealed on November 20 took place after the mission’s technical work was completed and were not discussed with the authorities,” 

In response to the IMF’s remarks, Bukele stated:

“Although we certainly do not agree on some aspects, such as the adoption of Bitcoin, the analysis it makes of our country is interesting,”

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