IMF issues warning on El Salvador’s Bitcoin experiment amid calls for greater transparency

El Salvador’s embrace of Bitcoin has yet to realize any initially predicted risks. However, greater transparency and attention are still needed, that is, according to a statement by the International Monetary Fund (IMF) following a visit to the country on Feb. 10. 

“While risks have not materialized due to the limited Bitcoin use so far—as suggested by survey and remittances data—its use could grow given its legal tender status and new legislative reforms to encourage the use of crypto assets, including tokenized bonds (Digital Assets Law) […]

Greater transparency over the government’s transactions in Bitcoin and the financial situation of the state-owned Bitcoin-wallet ( Chivo) remains essential, especially to assess the underlying fiscal contingencies and counterparty risks.”

The IMF’s statement came after a $600 million bond payment by El Salvador last month, which pre-empted the IMF’s “article IV” visit to the country, which took place between Jan. 30 – Feb. 8. 

The visit was the third by the IMG since El Salvador’s decision to make Bitcoin legal tender in September 2021. A decision that was thought to have officially closed the doors to further IMF financing, the IMF stressed after its most recent visit to the country that while it does not agree with El Salvador adopting Bitcoin as legal tender, some of the main risks have so far been avoided. 

However, it cautioned that while some of the initial risks concerning El Salvador’s adoption of Bitcoin have not come true, it would be unwise of the Latin American nation to continue pursuing a policy of its own monetary sovereignty, despite lacking a currency of its own (previously, it relied solely on the US dollar as legal tender).

“Financing purchases of Bitcoin by issuing tokenized securities should be eschewed because of fiscal risks[…] The use of proceeds by the new Bitcoin Fund Management should follow regular expenditure controls and good governance practices.”

All of this comes after El Salvador’s Congress passed a law regulating the issuance of digital assets by state and private entities, which passed on Jan. 11. The law allows the state to sell government bonds backed by Bitcoin, a policy that the IMF is cautioning against. 

Moreover, El Salvador plans to use these bonds to build a “Bitcoin City,” connected to a local volcano, Bukele’s grand vision is to use the volcano’s energy to mine clean Bitcoin.

However, since announcing his country would be accepting the cryptocurrency as legal tender and making an initial purchase of several hundred Bitcoin in Sept. 2021, the country’s total Bitcoin holdings are down 57% from their peak value.

Despite these concerns, the IMF praised El Salvador’s economy in its Feb. 10 report for its “full recovery” to pre-pandemic levels. The IMF projects that the country’s real GDP will grow by 2.4 percent in 2023, above the historical average.