On January 24, 2022 The Executive Board of the International Monetary Fund (IMF) concluded their consultation with El Salvador. According to the IMF’s press release regarding the consultation, the Executive Board’s assessment concluded that there are “large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities. They urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. Some Directors also expressed concern over the risks associated with issuing Bitcoin-backed bonds.”
El Salvador became the first nation-state to adopt Bitcoin as legal tender in September 2021 and their president Nayib Bukele has since become a prominent proponent of bitcoin. At the time, President Bukele said “we must break the paradigms of the past. El Salvador has the right to move toward the First World.” Prior to adopting Bitcoin, the US dollar was the only form of legal tender in the country – now both the US dollar and bitcoin are considered legal tender. In November 2021, just two months after Bitcoin officially became legal tender in El Salvador, the IMF released a statement that noted: “Given Bitcoin’s high price volatility, its use as a legal tender entails significant risks to consumer protection, financial integrity, and financial stability. Its use also gives rise to fiscal contingent liabilities. Because of those risks, Bitcoin should not be used as a legal tender.”
However, these recommendations have not deterred President Bukele. Since adopting Bitcoin as legal tender, El Salvador has bought over 1,500 bitcoins – including 410 bought just last week for approximately $15 million – and plans to issue a $1 billion bitcoin-backed bond later this year. Of the $1 billion raised, $500 million will be used to cover construction costs associated with energy and bitcoin mining infrastructure and $500 million will be used to buy more bitcoin. “Bitcoin City,” which was introduced by Bukele in November 2021, will be built near Conchagua volcano in south eastern El Salvador. The city plans include residential and commercial areas, services, entertainment, restaurants, and an airport. Residents and businesses located there will pay no taxes except for a sales tax.