IMF Presses El Salvador To Scale Back Bitcoin Law For Fiscal Stability

• IMF advises El Salvador to narrow Bitcoin law and limit public sector exposure to crypto.
• El Salvador’s Bitcoin experiment faces IMF push for stronger regulations, citing financial risks.
• IMF calls for tighter Bitcoin oversight in El Salvador as crypto volatility raises fiscal concerns.

The International Monetary Fund (IMF) said El Salvador should have eased the scope of its Bitcoin law, adding that the Central American country should steer a cautious path to the cryptocurrency in its economic arena. As the IMF and El Salvador discuss their economic strategies toward macroeconomic stability, the call is to pull back on Bitcoin.

Focus on Regulatory Strengthening

With recommendations in the cards, IMF Director of Communications Julie Kozack pointed to several during an Oct. 3 press conference. For example, laws like Bitcoin’s law may narrow their scope and enhance regulatory attention to the cryptocurrency ecosystem. 

“And the idea is to have the integration of Bitcoin under control to protect the El Salvador public sector from any possible financial volatility,” Kozak said of the IMF’s approach, which prioritizes a controlled Bitcoin integration.

The IMF advises El Salvador to build regulatory frameworks to oversee Bitcoin transactions and cryptocurrency. The IMF also said it is crucial to carefully oversee the risks related to Bitcoin’s price volatility, which can rupture public finances if circumstances in the market change abruptly.

Reducing Public Sector Exposure

A major piece of IMF advice concerns the public sector’s exposure to Bitcoin. El Salvador, the country that legalized Bitcoin last year, has been a heavy investor in the cryptocurrency, staking it in its treasury. Reducing public sector investments in Bitcoin eliminates the possibility of financial instability, which is unpredictable in the cryptocurrency world.

President Nayib Bukele uses Bitcoin as a financial inclusion tool as part of an anti-U.S. dollar movement. However, the IMF warns that such investments can expose the nation’s economy to Bitcoin’s price volatility and wreck its financial stability, which the IMF seeks to cultivate in El Salvador.

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IMF’s Broader Strategy in Latin America

The latest cattle call from the IMF to El Salvador is also part of a broader interest by the fund in Latin America in the region’s views on digital currency policies. Of course, the recommendations that the IMF will return to El Salvador with are that they alter their policies to align with central bank digital currencies and an expectation that cryptocurrencies are far less regulated and much crazier in terms of volatility. The IMF’s REDI framework, regulation, data collection, and enforcement are key to the IMF’s strategy for digital currency.

With every mile El Salvador runs with its adoption of Bitcoin, the story has attracted interest worldwide as a test case to learn from as other countries explore making similar moves. If talks with the IMF about El Salvador’s plans work out, this will be a factor in how other countries decide to include cryptocurrencies in their financial systems.