The International Monetary Fund (IMF) has issued a warning to El Salvador about using Bitcoin, the world’s first cryptocurrency, as legal tender because of the numerous risks that are associated with it. This warning was issued a day after Nayid Bukele, the Salvadoran President, announced his plans of building a ‘bitcoin city’ that would be financed by bitcoin bonds and powered by a volcano. On Monday, the IMF issued a warning to El Salvador that they shouldn’t use the pioneer crypto as its legal tender because of its risks. El Salvador is the world’s first country to have adopted Bitcoin as legal tender, along with the US dollar that it has been used for more than two decades.

The bitcoin law had gone into effect in the country back in September. Furthermore, the country’s president also disclosed that they had bought about 1,120 BTC. It is the norm for the IMF to undertake Article IV missions where member countries are concerned for consulting with the government officials before they can make use of its resources. The IMF elaborated that where El Salvador is concerned, they had talked about the adoption of bitcoin as the country’s legal tender, the e-wallet Chivo as well as the supervision and regulation of bitcoin services providers. 

The IMF said that considering the high price volatility of bitcoin, there are significant risks associated with its use as legal tender when it comes to financial stability, financial integrity and consumer protection. It added that the use of bitcoin would also lead to fiscal contingent liabilities due to which it wasn’t appropriate to use the cryptocurrency as legal tender. The IMF recommended that El Salvador narrow the scope of the bitcoin law and also strengthen the supervision and regulation of the new payments ecosystem. 

This statement comes just after El Salvador’s president announced a bitcoin city and said that there wouldn’t be any taxes in the city except for value-added tax (VAT). The IMF clarified that the plans of issuing sovereign bonds and then using the funds for buying bitcoin and funding infrastructure plans that were announced on November 20th had happened after the mission’s technical work had concluded. It added that these plans hadn’t been discussed with the authorities. As far as Bukele is concerned, he said that while he did not agree with the IMF on some things, such as the adoption of bitcoin, he did find their analysis of the country rather interesting.

The so-called Bitcoin City is expected to have commercial and residential areas, entertainment, services, an airport and restaurants and will be built in south Eastern El Salvador near Conchagua volcano. The construction of the city will begin next year. It is important to note that while El Salvador has adopted bitcoin as legal tender, not all of its population is happy with the move. Thousands of people had protested against it in September because they believed the introduction of the crypto could lead to instability in the Central American country. A bitcoin wallet by the name of Chivo had also been launched. 

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