IMF says Bitcoin Chivo Wallet Could “Increase Growth” But Calls for “Narrowing” BTC Law Due to High Volatility

The IMF has released its concluding statement on El Salvador adopting Bitcoin as legal tender alongside the US dollar.

In IMF’s discussion with El Salvador, they covered the regulation and supervision of Bitcoin services providers and e-wallet Chivo, but the latest plans to issue sovereign bonds and use the proceeds to buy Bitcoin and fund infrastructure that came this past weekend were not discussed with the authorities.

As we reported last week, El Salvador’s president, Nayib Bukele, announced issuing $1 billion in Bitcoin bonds, half of which will be used to market buy BTC.

In its risks section, the agency said unaddressed regulatory and supervisory gaps related to the use of Bitcoin presents sizable risks to the economic outlook.

At the same time, it noted that gains from financial inclusion and improved payment systems due to the introduction of a public e-wallet in USD could increase growth.

The statement also noted that El Salvador’s economy rebounded quickly from the pandemic that interrupted ten years of growth with the help of a Rapid Financing Instrument (RFI, US$389 million) approved in April 2020.

High remittances and public investment also helped a strong recovery, with the economy projected to grow by about 10% in 2021 and 3.2% in 2022.

In its Bitcoin section, the IMF welcomes the efforts to improve financial inclusion and raise growth but said risks arising from this should be addressed as well.

The agency pointed out the high price volatility of the cryptocurrency as the reason for significant risks to consumer protection, financial integrity, and financial stability, which also gives rise to fiscal contingent liabilities.

“Because of those risks, Bitcoin should not be used as a legal tender,” it said, recommending narrowing the scope of the Bitcoin law and strengthening the regulation and supervision of the new payment ecosystem for consumer protection, anti-money laundering, and counter financing of terrorism (AML/CFT), and risk management.

The IMF further called for Chivo wallet to segregate and ring-fence reserve assets, USD and BTC.

As for the recently announced plans to use the proceeds of new sovereign bond issuances to invest in Bitcoin, it “will require a very careful analysis of implications for, and potential risks to, financial stability,” IMF said in the statement.

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