Is it acceptable to use cryptocurrencies as a form of legal tender? El Salvador is of the opinion that this is the case. The small Central American country became the world’s first to accept bitcoin as its official currency on Tuesday. Taxes can be paid in cryptocurrency, and retailers who have the technology must accept it alongside the US dollar, which has been the official currency since 2001.
A network of cash dispensers, sponsored by a $150 million government fund, will allow customers to convert bitcoin into dollars without paying a commission. Salvadorans will get a free $30 digital wallet called Chivo, which means “cool” in Salvadoran slang.
El Salvador President Believes Bitcoin is Easy to Use
El Salvador’s authoritarian president, Nayib Bukele, believes the decision will encourage foreign investment and make it easier for Salvadorans living abroad to send home billions of dollars in remittances. The project’s quickness is impressive. Bukele made the announcement in early June. Three days later, his congressional backers enacted a late-night bill permitting bitcoin adoption within 90 days.
Bukele’s audacity has piqued the interest of crypto aficionados. A social media campaign is encouraging fans to buy $30 in bitcoin in bulk on Tuesday to show their support for El Salvador’s decision. Supporters of Bitcoin hope that more underdeveloped countries will follow Bukele’s lead.
Salvadorans, on the other hand, are less content. According to polls, the concept is opposed by a large majority of people. This could be due to apprehension about the unknown: according to one survey, just about 5% of people understand bitcoin. Citizens, on the other hand, are concerned about accepting payment in a currency whose value has fluctuated between $10,000 and $63,000 in the last year.
The plan is opposed by the international financial community. The International Monetary Fund (IMF) has issued a warning against using cryptocurrencies as legal money, citing dangers to macroeconomic stability, financial integrity, consumer protection, and the environment (creating bitcoin consumes large amounts of electricity).
A plea to assist El Salvador with bitcoin advice was denied down by the World Bank. The country’s debt has been downgraded by Moody’s to junk status. Last month, the yield on long-term Salvadoran government paper soared to about 11% as investors worried about the move.
The Move Appears Strange
El Salvador’s approach appears strange given the country has none of the currency volatility that crypto enthusiasts point to as a rationale for abandoning fiat money. Since adopting the US currency 20 years ago, the Central American country has seen minimal inflation and economic stability.
Encouragement of fintech neobanks will undoubtedly promote financial inclusivity, a frequently cited bitcoin benefit. Their widespread use in Latin America is assisting the unbanked in gaining access to financial services and lowering the cost of money transfers while avoiding the risks — and pollution — associated with bitcoin.
Other motives are suspected by Bukele’s detractors. The 40-year-old president’s hipsterish passion for bitcoin serves as a welcome diversion from widely panned previous moves to load the Supreme Court in order to gain a ruling allowing him to compete for re-election in 2024.
The bitcoin gamble might also be a stepping stone toward a longer-term goal of replacing the US dollar with a local stablecoin, which is a cryptocurrency whose value is supported by a real-world item.
Whatever Bukele’s motivations, the experiment is unlikely to succeed. El Salvador’s rapid adoption of bitcoin is laden with danger, and regular Salvadorans will almost certainly pay a high price for their president’s bet. This isn’t to say that innovation isn’t welcome: central bank digital currencies, for example, have a lot of potentials if properly deployed. However, bitcoin isn’t popular as a form of government-backed legal money.
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