The Central American nation of El Salvador has now formally adopted bitcoin and made it a legal tender twenty years after making the US dollar the country’s national currency. This makes El Salvador the first country in history to adopt cryptocurrency as a legal tender for acquiring goods and services alongside the dollar.
Genius or Folly?
In what is known as one of the gutsiest moves by any nation, Salvadoran President Nayib Bukele announced on Monday the country’s acquisition of 200 more bitcoin bringing their total to 400 units worth about $21 million at its present trading levels.
The rollout, which took place on Tuesday, September 7, 2021, is a revolutionary and ballsy move considering the cryptocurrency’s volatility. During its 12-year existence, bitcoin prices have dropped and spiked tremendously, making it very unstable as a legal tender. Just over the past year, the digital currency went through an exciting roller coaster ride as it lost more than half its value in one day at the pandemic’s onset and gradually recovered, albeit with certain drops and surges. It is currently valued at around $52,000 which.
The 40-year-old head of state tweeted publicly about the government’s acquisition of the cryptocurrency and is quite optimistic about this significant move.
Although it is still technically in its experimental stage, if the move proves successful, neighboring countries keeping a close eye on El Salvador might follow suit. Other governments in the region have already taken steps in the same direction, with Cuba already legalizing cryptocurrency on the island. In contrast, Uruguay and Panama have made similar proposals for legislation.
Even countries like the Bahamas and Venezuela, both of which have their own digital currencies, are examples of countries seriously considering adopting digital currencies. The only difference is that their Sand Dollar (Bahamas) and Petro (Venezuela) are backed by their respective central banks, unlike bitcoin, a decentralized digital currency.
Now the plan in El Salvador is to allow the use of bitcoin as legal tender. This means it can be used to pay for goods and services and even taxes. As for which types of goods and services fall under this experiment, we still have yet to see the limitations. Still, the new legislation requires all businesses to accept digital currency as payment. Bitcoin can be used to pay for groceries and car repairs or settle a home equity loan. The only exceptions are establishments that have no access to technology that allows them to receive digital currency.
The Salvadoran government has already put in place around 200 bitcoin ATMs all over the country. These ATMs can be used for dollar exchange. The country’s Finance ministry even put in place a $150 million fund to back all the transactions. The dollar will remain the primary national currency for accounting purposes and provision for merchants with no access to bitcoin. But everyone else is expected to get with the program.
Will It Work?
One of the many considerations that catapulted this operation is how 70% of the country’s active population has no bank accounts. Since bitcoin is stored in digital wallets, this somehow solves the problem for people who have no means of getting to traditional banks to improve access to their finances, especially those living in poorer communities.
Salvadorans can download the government-created app called Chivo on their digital devices. The app comes with $30 worth of bitcoin for those who register using their Salvadoran national ID.
At this point, everything is still experimental. El Salvador is venturing into unknown and uncharted territory. The playbook for this will be written as they go along. As no guarantee of success practically exists, many Salvadorans are still on the fence about these changes.
First, even with the $120 million funds stashed in Banco de Desarrollo de la Republica de El Salvador, the question is, is it enough to back up all transactions in light of the volatile nature of the cryptocurrency?
Then there’s also the lack of information. The regular and uninitiated Salvadoran has a hard time wrapping their head around this because of the lack of education and preparation. Perhaps the number of skeptics would be significantly lower if the people were educated and prepared beforehand.
It is believed that the transition to bitcoin will help the Salvadoran people save over $400 million annually on remittance fees from migrant workers. However, most of the population prefers using dollars and asks for the law to be repealed until further studies provide more concrete positive results. Due to its transparency and environmental setbacks, even the World Bank and the International Monetary Fund have warned against the high risks of using bitcoin as legal tender.
In this case, everyone has to wait and see how things play out for El Salvador in the coming years and months to see if their plan works.