For a country like El-Salvador, with an estimated population of 6,830,000 million people who are on the fore-front of influencing the bitcoin trade, it made it know to public legalising bitcoin had its legal tender in September 2021. with their recent publication of building a bitcoin-powered city, which has raised eyebrows of the International Monetary Fund (IMF).
According to the banking organization, the central American country's plans to buy more bitcoin will need a "very careful analysis" of the implications for its financial stability.
According to an IMF statement, bitcoin should not be used as legal cash in El Salvador, and the Central American country should improve its regulation and supervision of its newly created payment environment.
The IMF advised El Salvador to reduce the scope of its Bitcoin Law, citing "serious dangers" that bitcoin poses to consumer protection, financial integrity, and financial stability in a statement released on Monday.
The study coincided with an official IMF visit to El Salvador, which was undertaken in accordance with Article 4 of the IMF's Constitutive Agreement, which provides an annual assessment of its members' fiscal, monetary, and external situations.
The International Monetary Fund stated that President Nayib Bukele's issuance of a $1 billion bitcoin-backed bond in the early hours of Saturday was never discussed in joint meetings between government officials and the institution.
Although the bond announcement was not included in the IMF's technical analysis, the financial institution stated that El Salvador's plans to buy more bitcoin after the bond issuance, as well as increase its bitcoin exposure, "will necessitate a very careful analysis of implications for, and potential risks to, financial stability."
El Salvador's public debt might reach 95 percent of GDP by 2026, according to the IMF, if the country does not take "bold policy steps" to rectify fiscal imbalances and remove growth limitations. The debt numbers do not include the recently disclosed bitcoin bonds, according to the IMF.
The IMF suggested that El Salvador consider winding down the $150 million trust fund set up to allow the exchange of bitcoin for US dollars as one of the ways to limit contingent fiscal liabilities.
The financial institution also suggested that the government should have public funds from Chivo Wallet, a digital wallet created by the Salvadoran government, on September 7.
El Salvador's new payments ecosystem, according to the IMF, requires "rapid implementation of tougher regulation and control."
The Chivo Wallet should also be obliged to preserve monies – both in US dollars and bitcoin – "by separating and ring-fencing reserve assets, according to the report.
According to the International Monetary Fund (IMF), banking regulations should include prudential measures such as conservative capital and liquidity limits for bitcoin exposure.
El Salvador must also examine how bitcoin-related transactions are reported in order to understand how the cryptocurrency affects the Salvadoran economy and to properly monitor risks, according to the IMF.
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