In a startling occurrence of events, El Salvador, a small country tucked into a corner of Central America, has accepted the cryptocurrency Bitcoin as legal tender. It now has official legal status alongside the US Dollar, meaning you can now use Bitcoin anywhere in El Salvador. This nation is the first to do so and has been lauded for heralding a new age of cryptocurrency as legal tender in an increasingly digitized world. However, this move is not without its detractors. Critics have said that this can bring an already wavering economy to its knees. Let’s explore what this groundbreaking decision entails and how this can change El Salvador’s (and the rest of the world’s) future.
What is El Salvador Doing?
In order to facilitate this shift towards Bitcoin, the El Salvador government bought 400 bitcoin valued at $20.9 million dollars the day before enacting the law. They have also created the app Chivo to buy and manage users’ crypto and installed commission-free ATMs throughout the country. For downloading this app, each Salvadorean will get $30 worth of Bitcoin.
Why Bitcoin + Crypto?
Before understanding the reason behind this shift to cryptocurrency, one must understand some background information about El Salvador. It is a small Spanish-speaking country in Mesoamerica, bordering Guatemala, Honduras, and the Pacific Ocean. Regarding its economic standing, El Salvador is a developing country with an Human Development Index (HDI) of 0.673, along with relatively high income inequality. Though moving towards industrialization, the majority of the population has historically participated in an informal economy revolving around agriculture and textiles.
For this reason, Salvadoran President Nayib Bukele envisions cryptocurrency as a means to link the populace into a more organized economic system. In addition, since most citizens don’t have a bank account, proponents of this move see this as an opportunity to improve financial security and promote the digital transference of remittances.
The response to the enactment of this law has been overwhelmingly negative; upwards of 70% of Salvadoreans oppose making Bitcoin legal tender. Crypto is infamous for its volatility based on the whims of supply and demand. This unease in accepting Bitcoin stems from the fact that the currency’s value isn’t tied to anything tangible, as opposed to standard currencies such as the dollar or euro. In addition, using such digital currency is unfeasible for many citizens; 25% are below the poverty line, and only ⅓ of the population uses the internet.
And the experts seem to agree, citing volatile exchange rates and the potential for illegal activity through crypto. El Salvador’s credit scores have been sliding as a result, and may have trouble securing financing from organizations such as the World Bank, IMF, or other nations.
What this Means for the Future
Once again, the general consensus is split down the middle for the implications of El Salvador’s adoption of cryptocurrency. This could mean a revolutionary way to facilitate transfers of money across boundaries, providing an alternative for people without access to financial services or bank accounts. And this “pseudo-banking” is just the tip of the iceberg; Bitcoin could have the makings of the first truly global currency, with it all starting off in tiny El Salvador. What’s more, this may encourage further widespread use of all cryptocurrencies. But at the same time, Bitcoin’s defining features are holding it back. The blaring fact that this crypto’s value isn’t tied to anything tangible causes it to be subject to erratic changes, which is unfavorable for a currency.
One thing is for sure; El Salvador’s adoption of Bitcoin marks a turning point in cryptocurrency, and potentially the history of the global economy.