El Salvador will become the first sovereign country to make bitcoin “legal tender.” This means it’s now an official currency alongside the US dollar. (El Salvador dollarized on January 4, 2001 as a reflection of the fragile economies of Latin America.)
This means El Salvadorans can now pay for anything — food, rent, or even taxes — using bitcoin.
The initiative is the idea President Nayib Bukele, a 40-year-old populist whose 90% approval rating has given him hope that he can model the country in his vision with widespread support.
Why adopt Bitcoin?
About 25% of El Salvador’s GDP comes from remittances. This is money sent back to the country from people working abroad. Bitcoin could help reduce fees on cross-border transactions.
No longer will people be dependent on services like Western Union, Moneygram, or even PayPal, which take fees on payments.
It’s an attempt to bring more Salvarodans into the economy. The majority of the country’s citizens don’t have a bank account.
Bukele also thinks that being a pioneer in bitcoin adoption can help El Salvador become a destination for foreign investment in bitcoin mining.
Bitcoin is energy-intensive. So, Bukele’s ambition is to use geothermal energy from El Salvador’s volcanoes to power the mining process.
El Salvador’s bitcoin experiment brings risks, including for cybersecurity
Cryptocurrency is popular, even mainstream you could say, but bitcoin is still a small market.
It hasn’t been used as an actual currency at any scale before.
As a business or merchant, it’s hard to accept as a payment because of its volatility. It runs the risk of losing value after transactions are made.
As a result, bitcoin has been popular among black market activity, where it’s a convenient alternative to cash or other off-the-grid methods. They contend with its volatility because of the nature of the business.
Traditional financial institutions don’t operate in bitcoin, so there’s stability risk. the International Monetary Fund (IMF) is concerned that El Salvador’s adoption of the crypto could create serious risks for the country’s economy, especially should the value fall.
As a result, it downgraded El Salvador’s debt further into junk territory.
Others say the bitcoin move is a PR play to distract from Bukele’s increasingly authoritarian tactics (in a similar vein to Elon Musk’s use of bitcoin at Tesla).
After his recent calls to “purge” the government’s judicial branch, his allies recently passed a law to remove one-third of the country’s judges and prosecutors.
It also makes activity harder to trace, which could make black market activity easier and impede tax collection.
However this turns out (and no one knows yet), expect a lot of “I told you so”s from both proponents and skeptics.