International Monetary Fund

El Salvador’s ‘limited’ use of Bitcoin prevents forecasted risks, says IMF

The IMF has suggested that El Salvador “reconsider” its plans for Bitcoin following a recent visit to the country.

The global monetary watchdog has advised El Salvador to exercise caution in expanding government exposure to Bitcoin (BTC) due to the “speculative nature” of crypto markets.

A Feb. 10 statement from the International Monetary Fund (IMF) emphasized Bitcoin’s risks to El Salvador have “not materialized” yet due to the country’s “limited” use of Bitcoin. IMF staff paid a recent visit to the country.

The IMF stated that El Salvador should address Bitcoin’s risk to the country’s fiscal sustainability and consumer protection, as well as its financial integrity and stability.

It highlighted the importance of acknowledging these risks, as Bitcoin’s use in El Salvador “could grow,” given it had been recognized as legal tender in the country since Sept. 2021.

El Salvador was urged to rethink its decision to issue tokenized bonds, as the IMF stated it should be “eschewed” due to its legal and financial risks. The statement noted:

“Given the legal risks, fiscal fragility and largely speculative nature of crypto markets, the authorities should reconsider their plans to expand government exposures to Bitcoin, including by issuing tokenized bonds.“

The need for “greater transparency” from the Salvadoran government was also emphasized regarding both its Bitcoin transactions and the “financial situation” of its state-owned Bitcoin wallet, the Chivo wallet.

Related: El Salvador’s Bitcoin decision: Tracking adoption a year later

This comes after recent news that a legal framework for a Bitcoin-backed bond in El Salvador, known as the “Volcano bond,” was established on Jan. 11.

The Salvadoran government said that these bonds would be used to pay down sovereign debt and fund the construction of its proposed “Bitcoin City.”

Bitcoin City is part of El Salvador’s plan to continue attracting crypto investors. It was previously noted that a priority for the country in 2023 is to address any possible cryptocurrency-related criminal activity.

Guillermo Contreras, CEO of DitoBanx, previously told Cointelegraph on Jan. 6 that the opening of the National Bitcoin Office in El Salvador will function as “a central entity” to deal with these issues.

Crypto assets are no longer niche and regulators need to catch up — IMF

Recent failures of crypto issuers, exchanges and hedge funds are major motivators behind better crypto regulation.

The past few years have seen crypto assets moved from being “niche products” to having more of a mainstream presence, prompting the need for more comprehensive regulation of the space, according to the International Monetary Fund (IMF).

In a new report authored by IMF capital markets director Aditya Narain and assistant director Marina Moretti, officials noted that crypto assets have firmly shifted away from being “niche products” to ones used for speculative investments, hedges against weak currencies and payment instruments.

The authors added that this, along with recent failures of crypto issuers, exchanges and hedge funds have “added impetus to the push to regulate.”

However, developing regulatory frameworks for crypto assets is an uphill battle, according to Narain and Moretti, highlighting the market’s rapid evolution, the difficulty of monitoring and the absence of workable skills between regulators among the more serious obstacles, stating:

“Regulators are struggling to acquire the talent and learn the skills to keep pace given stretched resources and many other priorities.”

The authors have also called out the inconsistent approach to crypto regulation among various regulators, instead arguing for a coordinated, consistent and comprehensive global crypto regulatory framework.

“Some regulators may prioritize consumer protection, others safety and soundness or financial integrity. And there is a range of crypto actors — miners, validators, protocol developers — that are not easily covered by traditional financial regulation,” they explained:

“A global regulatory framework will bring order to the markets, help instill consumer confidence, lay out the limits of what is permissible, and provide a safe space for useful innovation to continue.”

Regulators around the world have continued to gather around the regulatory table.

In Europe, the final legal text for the long-awaited Markets in Crypto-Assets (MiCA) regulations are set to be released within the next four to six weeks. In the United States, a crypto regulation bill named the Responsible Financial Innovation Act is set to address some of the biggest questions facing the digital assets sector.

Related: Australia’s new government finally signals its crypto regulation stance

Even staunch crypto skeptics have started to fall in line with the idea of regulation over any widespread ban, with U.S. congressman Brad Sherman becoming the latest to change his tune after admitting the market “has too much money and power behind it,” to ban it now.