IMF Warns El Salvador Against Using Tokenized Securities to Fund Bitcoin Purchases

The International Monetary Fund (IMF) has cautioned El Salvador against using tokenized bonds to fund Bitcoin purchases and urged it to reconsider its plan to expand its exposure to the cryptocurrency.

In a statement following the so-called “Article IV” visit by IMF staff to the Central American republic, the lender noted that although the downsides of using Bitcoin had “not materialized”, it still posed an imminent threat to the country’s economic stability.

The IMF expressed concerns over the risks that Bitcoin could bring to financial stability, fiscal sustainability, and customer protection urging the government to be more open in its management of Chivo and the Bitcoin trust fund (FIDEBITCOIN), including auditing.

El Salvador became the first country in the world to adopt Bitcoin as a legal tender after passing a law to that effect in Sep. 2021. By mid-November 2022, the country had amassed some 2,381 BTC. Notably, President Nayib Bukele tweeted on Nov 17 that the treasury would buy one bitcoin daily.

Based on data from “Nayib Bukele Tracker”, a service that indexes BTC, if those purchases were made, that would mean that El Salvador holds roughly 2556 coins acquired for about $110.4 million. The current value of that investment is $55.8 million, for a paper loss of roughly $54.5 million. However, the government has never disclosed where the BTC is stored.

“Greater transparency over the government’s transactions in Bitcoin and the financial situation of the state-owned Bitcoin wallet ( Chivo) remains essential, especially to assess the underlying fiscal contingencies and counterparty risks,” IMF said.

The lender further proposed that the government should refrain from providing financing for the acquisition of Bitcoin by issuing tokenized securities and that the money obtained by new Bitcoin fund managers should be subject to standard spending regulations and good governance practices. It also stated that the protections offered by the recently implemented Digital Assets Law should be equal to those that are provided in regulations concerning traditional securities regulations.

IMF’s annual staff visit comes after El Salvador completed an $800 million bond payment last month amid investor concerns over the country’s financial health. This is not the IMF’s first time heavily criticising Elsalvador’s Bitcoin agenda. Last year, the lender urged the government to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status. It also expressed concern over the risks associated with issuing bitcoin-backed bonds.

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