The International Monetary Fund (IMF) is urging El Salvador to stop using cryptocurrency bitcoin as legal tender.
The Central American republic became the first country in the world to adopt bitcoin in September last year, putting it on equal footing with the US dollar in the country.
But the IMF's executive directors said in a report that it creates liabilities for the country and "entails large risks for financial and market integrity, financial stability, and consumer protection".
The IMF noted the El Salvador economy had rebounded well from the COVID-19 pandemic, but public debt issues have since emerged.
With bitcoin as a legal currency, it could potentially stop the country from getting cheap loans to service that debt.
Directors of the IMF said that digital payments - such as the Chivo wallet the country chose to manage bitcoin - could help boost financial inclusion in El Salvador, but that required strict regulation and oversight.
"They urged the authorities to narrow the scope of the bitcoin law by removing bitcoin’s legal tender status," the report said.
"Some directors also expressed concern over the risks associated with issuing bitcoin-backed bonds.
Bitcoin's price has dived in recent weeks. The 400 bitcoins El Salvador purchased in the week before it made the cryptocurrency legal were worth US$21 million at the time, but are now worth less than $15 million.
President Nayib Bukele, a big proponent of cryptocurrencies, said last week the country had bought even more, hoping to take advantage of the dip in price.
At the time bitcoin was made legal tender, the IMF said the country needed to safeguard funds in both US dollars and bitcoin by "segregating and ring-fencing reserve assets".
It should also analyse bitcoin-related transactions in order to understand how the cryptocurrency affects the economy, the IMF said.
Polls in the Central American republic have shown citizens are sceptical over bitcoin, and its use has attracted street protests.
But Bukele is determined to embrace it even more, with plans to build the world's first 'Bitcoin City'.
The city, set to be in the La Union region of the country, would get geothermal power from a volcano and not have any taxes with the exception of value added tax (VAT), Reuters said.
"Invest here and make all the money you want. This is a fully ecological city that works and is energised by a volcano."
