Crypto regulatory affairs: IMF pressures El Salvador on legal tender status for Bitcoin

IMF pressures El Salvador on legal tender status for Bitcoin

The International Monetary Fund (IMF) has issued a public warning over El Salvador’s decision to accept Bitcoin as legal tender. The IMF, which serves as the main source of loans for developing countries, claims that volatility in the virtual asset market – along with the potential to facilitate illegal activity – makes Bitcoin unsuitable for use as legal tender. Perhaps more importantly, the lender stated that if El Salvador continues down the path of accepting bitcoin as legal tender, it may be deemed ineligible to receive loans in the future. This is of particular concern as El Salvador recently sought $1.3 billion in IMF funding.

The organization’s primary concerns appear to be related to “financial stability, financial integrity and consumer protection.” Although it also noted that issues related to debt issuance could arise, as the bonds issued by the country would be implicitly backed by bitcoin as well as dollars. This could have a negative impact on El Salvador’s Article IV rating, which is a process by which “a team of IMF economists visits a country to assess economic and financial developments and discuss the country’s economic and financial policies with government and central bank officials.” The results of the Article IV examination are reported to the IMF Board of Directors and may have a direct impact on the country’s ability to continue working with the financial institution.

While Salvadoran President Nayib Bukele has been a staunch proponent of Bitcoin’s promise as legal tender, the adoption process has not been without controversy in the country. In September 2021, protesters vandalized several Chivo ATMs used to convert dollars into bitcoin and marched in opposition to the policy mandating the adoption of the virtual asset by merchants and sellers. Regardless, over the past few months, Bitcoin has been widely accepted by the Salvadoran population, and since the policy went into effect, over three million wallets have been opened. More Salvadorans now have Bitcoin wallets than traditional bank accounts, and dollar inflows into BTC have far outpaced outflows, as citizens have embraced the fast and efficient transactions allowed on the Bitcoin Lightning network.

The IMF’s call certainly concerns those who would support the wider adoption of bitcoin and other virtual assets globally, although it also represents a unique and significant opportunity for engagement. By partnering with the IMF to develop a mutually beneficial legal tender policy framework, El Salvador could potentially help set a revolutionary precedent for supranational regulatory integration of fiat and digital currencies. At this time, it is imperative that the parties work together to advance the mission of financial inclusion and technological innovation, while maintaining the credit support structures that are vital to the success of developing countries around the world.

Texas governor wants to attract Bitcoin miners

Texas Governor Greg Abbot said this week that the state should seek to attract and accept Bitcoin miners in an effort to secure its controversial power grid. Texas – which operates outside the rest of America’s electrical infrastructure – suffered severe price drops and spikes as energy suppliers struggled to meet peak demand. Abbott claims that by attracting Bitcoin miners, there will be more demand for energy on the grid, prompting developers to build new power plants to support demand. While the plan may hold promise, opponents argue that miners will place significantly increased demand on an already strained grid while new energy sources are still under construction.

US executive to announce crypto strategy

The Biden administration has indicated that it will soon release a report detailing a government-wide cryptoasset strategy. The Guidance – which will be released as a National Security Council memorandum – will address how agencies across government should assess both the costs and benefits that crypto can represent. In addition, the impacts of central bank digital currency (CBDC) will be explored. – probably in conjunction with the Federal Reserve. A clear and unified approach to regulating the virtual asset market could prove to be a boon for large institutional players in the space, who have the funding and infrastructure to quickly support new regulatory requirements. It is better for all crypto stakeholders to understand expectations and have a predictable regulatory regime than to live in a world of uncertainty and constant consternation. Any strategy within government will likely emphasize the need for adequate compliance controls around customer verification and transaction tracking, which Elliptic’s Lens, Navigator and Discovery can facilitate.

Indonesia bans financial institutions from crypto services

Regulators in Indonesia have clarified the country’s stance on virtual assets, stating that financial institutions may not facilitate the purchase or sale of cryptocurrency – despite the country being one of the biggest hubs for crypto activity in Asia. Following pressure from several Islamic NGOs, who claim cryptocurrency is incompatible with their religious teachings, Indonesia’s financial regulator Otoritas Jasa Keuangan (OJK) released a statement saying it has “strictly prohibited financial services institutions from using, marketing and/or enabling crypto asset trading”. Although there is still no complete ban on crypto activities in the country, crypto assets cannot be legally used for payment purposes and their exchange is strictly limited. The news comes during something of a turning point for cryptocurrency regulation in Asia, as some jurisdictions have fully embraced the potential of virtual assets while others have outlawed their use entirely.

The initial phase of CBDC testing in South Korea has been completed

In a report released this week, the Bank of Korea indicated that it has completed the first phase of testing for its proposed central bank digital currency (CBDC). Although the bank admitted that further reviews and future tests are still necessary to ensure that CBDC will work in practice, initial testing has shown that the digital implementation of Won has so far worked as expected. Built by Ground X, a subsidiary of South Korean tech giant Kakao, the platform is expected to leverage the Klaytn blockchain – launched by Ground X in 2018. News of the project’s success comes as countries around the world explore the potential for integrating CBDCs into their own economies and financial systems.