In June 2021, El Salvador became the first nation to officially return Bitcoin (BTC) legal currency. As a result, businesses in the country are able to show prices for goods and services in BTC. Residents are also able to pay taxes in BTC. The government's move was reported to support around 70% of residents who did not have access to financial services at the time.
The risk of cryptocurrencies to financial stability is a growing concern
Earlier this year, the Bank of England (BoE) raised concerns about cryptocurrencies and the possible risks they pose to financial stability. The IMF raised similar concerns earlier this year. Echoing the BoE, the IMF has called for a global regulatory framework for cryptocurrencies.
Just this week, the Financial Stability Board (FSB) released a report, talking about the risks associated with cryptocurrencies. Aligned with the BoE and the IMF, the FSB has talked about the interconnectedness of crypto-assets and core financial institutions and financial markets that could impact global financial stability.
While agencies and regulators have raised concerns amid increased adoption, the IMF and rating agencies have also been vocal.
Agencies scold El Salvador's adoption of Bitcoin
Since El Salvador's move to accept Bitcoin as fiat currency, rating agencies and the IMF have raised material concerns.
Late last month, the IMF raised concerns about Bitcoin as a fiat currency. The IMF warned of large risks associated with "the use of Bitcoin on financial stability, financial integrity and consumer protection, as well as contingent tax liabilities." Last year, El Salvador applied for a $ 1,3 billion loan, leading to an IMF executive council review on El Salvador.
Earlier this month, Fitch Ratings downgraded El Salvador's sovereign rating to CCC. Among the reasons for the downgrade was the adoption of Bitcoin as fiat currency.
US lawmakers aim to mitigate the risks of Bitcoin adoption in El Salvador
This week, US senators targeted the adoption of El Salvador's Bitcoin as fiat currency. A group of US senators has introduced the “Accountability for Cryptocurrency in El Salvador (ACES) Act” legislation.
The bill requires that, "no later than 90 days after the day of the promulgation of this law, the Secretary of State, in coordination with the heads of other relevant federal departments and agencies, must submit a report to the appropriate committees of Congress on the adoption by the government of El Salvador of a cryptocurrency as legal currency ".
In an effort to mitigate the risks to the US financial system, the bill also states that: "No later than 90 days after the submission of the report required by subsection (a), the Secretary of State in coordination with the of other relevant federal departments and agencies, will present to the appropriate committees of Congress a plan to mitigate any potential risk to the US financial system posed by the adoption of a cryptocurrency as legal tender in El Salvador; and any other country that uses the US dollar as legal tender ". It remains to be seen how the legislation can mitigate any risk to the US financial system.