The country of El Salvador has been urged to reserve its decision to officially adopt Bitcoin as a legal tender in the country.

Last September El Salvador became the first country in the world to accept Bitcoin as a legal tender, after the digital currency was officially adopted on Tuesday 7 September 2021.

The approval by Parliament in June 2021 to back President Nayib Bukele’s drive to embrace the cryptocurrency was extremely controversial at the time, and resulted in large-scale protests and fears it would bring instability and inflation to the impoverished nation.

Controversial move

Indeed, the World Bank (the international lender to developing nations) refused to help El Salvador implement it as legal tender, due to concerns over transparency and the environmental impact of Bitcoin mining.

Rating agency Fitch also warned of greater risks for banks, and said the move could open floodgates to money laundering, increase banks’ exposure to regulatory risks..

And central banks and financial regulators in many other countries repeatedly warned of cryptocurrencies’ notorious volatility and said buyers should be prepared to lose all their money.

Nevertheless President Bukele pressed ahead with the Bitcoin adoption, and last November he even proposed building a brand new city financed by government Bitcoin bonds.

The proposed city would be built at the base of a volcano in the country, where geothermal energy could be used to help power it.

Impoverished nation

Essentially President Bukele sees Bitcoin as a way to help low income countries like El Salvador move from a largely cash economy, to a digital economy, where a person’s bank account is essentially their smartphone.

It should be noted that roughly 70 percent of people in El Salvador do not have bank accounts or credit cards.

The country replaced its its local currency, the colón, with the US dollar in 2001.

Historically the country had a mostly agriculture-based economy, but it has been riven chronic political and economic instability including coups. It continues to struggle with high rates of poverty, inequality, and gang-related violent crime.

Nowadays remittances account for more than 20 percent of El Salvador’s GDP, and incumbent services can charge 10 percent or more in fees for international transfers that take days to arrive and must be collected from a physical location.

Legal tender

Prior to its adoption, a survey in El Salvador revealed that nearly three quarters of the population there disagreed with their government’s decision to adopt Bitcoin.

In an effort to sweeten the deal, the El Salvador government allowed citizens to download a digital wallet app, which gave away $30 (£22) in equivalent Bitcoin to every person in the country.

However, due to the extreme volatility of Bitcoin, there was concern that any monetary value could be seriously impacted by a crash in the e-currency.

And this happened after the value of Bitcoin crashed the day that El Salvador officially adopted the e-currency.

Matters were not helped by technical glitches, server crashes, and even street protests at the move.

And protests continued to be seen on the streets, weeks after the adoption

IMF warning

Now the International Monetary Fund (IMF) has entered the debate, and has urged El Salvador to reverse its decision to make Bitcoin legal tender, according to Bloomberg.

The IMF warned President Bukele of the risks the cryptocurrency poses to the country, and said it would be difficult for the country to get a loan from the institution.

The IMF “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status.”.

It highlighted the “large risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection” and with issuing Bitcoin-backed bonds.

Bitcoin’s value has plummeted in the past month.

As of Wednesday it was trading at $37,992, having lost nearly half its value since hitting a record high of $69,000 in November.

Tom Jowitt

Tom Jowitt is a leading British tech freelancer and long standing contributor to Silicon UK. He is also a bit of a Lord of the Rings nut...

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