The International Monetary Fund has warned that bitcoin poses “significant risks” to consumers, citing El Salvador’s recent move to make the e-token legal tender as the country prepares to launch a crypto-funded “Bitcoin City.”
While cryptocurrencies and digital money have the potential to make payment systems more “efficient,” El Salvador’s decision to make bitcoin a legal tender was a risky one, the IMF said in a release on Monday.
“Given bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability,” the global financial body said, urging for “strengthening the regulation and supervision of the new payment ecosystem.”
Because of those risks, bitcoin should not be used as a legal tender.
El Salvador passed a law granting bitcoin the status of an official legal tender alongside the US dollar last September, becoming the first nation in the world to recognize the crypto. The government has since backed an e-wallet system called Chivo that allows residents to arrange bitcoin payments, as well as convert the digital coins into US dollars.
While the IMF recognized the system could enhance “financial inclusion and [support] growth,” it called for additional legal safeguards to protect consumers, as well as to counter money-laundering and the “financing of terrorism.”
The IMF’s warning comes just days after El Salvador unveiled plans for the world’s first “Bitcoin City,” which will be initially funded by crypto-backed bonds. Announced last weekend, the city will be built near the Conchagua volcano in the country’s southeast, and will feature commercial and residential areas, as well as entertainment venues, restaurants, an airport, among other amenities common to a modern metropolis. Still in the conceptual stage, a first bond offering is set for 2022, with construction planned some two months after financing is secured.
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