This is probably the biggest financial event of the 21st century. What if other countries follow the lead too?
- El Salvador is the first country to accept bitcoin as legal tender starting Sept 7.
- The nation buys 400 Bitcoin ahead of the decision, amounting to $20 million in market value.
- Salvadorans will be able to use bitcoin through e-wallet Chivo for retail payments.
- Bitcoin ATMs open up in different parts of country.
While most countries around the world are still grappling on how to regulate bitcoin and other cryptocurrencies, El Salvador has become the first country in the world to accept bitcoin as legal tender as of Tuesday. There is, however, widespread domestic scepticism surrounding the move, despite the impressive 80% approval rating that the 40 years old president of the country, Nayib Bukele, enjoys.
President Bukele and his government believe that the decision will allow a large number of citizens of the country to gain access to banking services for the first time while the economy will be able to save about $400 million in fees on remittances sent by its citizens from abroad each year.
Now that the world’s biggest cryptocurrency has managed to become a legal currency of a nation after 12 years of being launched, the question arises- how will El Salvador execute a Bitcoin economy?
Let’s find out.
How Bitcoin will be used in El Salvador
As of Tuesday, Salvadorans will be allowed to use bitcoin to buy a cup of coffee, get a haircut or even pay taxes and home loans.
For the starter, the administration plans to spend more than $225 million for a $30 credit in bitcoin to those who take up Chivo, a government-run e-wallet that citizens can use for purchases of Bitcoin or U.S. dollars.
A network of 200 Bitcoin ATMs is being set up by the government throughout the country while also building a chain of stylish Chivo-brand kiosks located at plazas around the country. These kiosks will be equipped with professionals to introduce average Salvadorians to the concept of Bitcoins.
The announcement that has taken the global markets and analysts by surprise was made by Bukele on Twitter on Monday-
“Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador. Bitcoin did this,” Bukele tweeted.
The president announced that the country had purchased its first 400 bitcoins, in two batches of 200 each, while also promising that more were to follow. According to the cryptocurrency exchange app Gemini, the value of the 400 bitcoins was about $20 million at the time of the purchase.
According to the government, adopting bitcoin as a legal currency will help in the development of affordable financial services in the country where an estimated 70 per cent of people carry out transactions in a vast cash-based economy.
There are businesses that like the move of the government because they believe it helps to widen the payment options for their customers and clients as the e-wallet is an easy-to-use mobile app and helps in eliminating expenses such as the credit card fees that banks charge to merchants.
The country had surprised the world in June this year after its Congress voted in an overwhelming majority to approve the law. The move is projected by the lawmakers to ultimately boost foreign investment, and enhance financial inclusion and generate jobs.
This move also comes at a crucial time for the economy as it grapples to tackle a widening budget gap and limited access to debt markets. The administration under Bukele has also been accused of taking authoritarian control of the country.
What it means for Bitcoin and El Salvador’s economy?
Since 2001, the U.S. Dollar has been used as the official currency of El Salvador. From Tuesday, Bitcoin will join the dollar.
For the world of bitcoin and other cryptocurrencies, this move is a landmark event and can turn out to be a game-changer for the crypto world. The move can also be crucial in dispelling widespread scepticism against Bitcoin as an acceptable asset and currency, despite the fears and concerns of its high level of volatility.
For El Salvador, this move can make it a cryptocurrency hub. However, some also foresee a clash in the ambitions of the country to negotiate a $1 billion program with the International Monetary Fund to prop up its ailing economy.
There are also concerns surrounding security risks as the funds held in the Chivo wallet are controlled by the government on behalf of its citizens which can be attractive for hackers.
Further, the main channel for remittances to the country from citizens living abroad is financial service companies which now will accept payments in bitcoin but will immediately convert them into dollars.
Moreover, it would also be a challenge for the government of El Salvador to prevent the federally regulated U.S. banks, which provide financial services to banks in the country, from severing ties because of due diligence and compliance risks.
And last but not the least; the government also has to work out a way to hedge the impact on the economy of the high volatility of Bitcoin if more Salvadorians chose to convert U.S. Dollars to Bitcoin. The price of goods and services in the country will also be affected by the high volatility of the cryptocurrency, which in turn will affect consumers, believes Oscar Cabrera, an economist at the University of El Salvador.
In June when Congress passed the bill legalizing Bitcoin as a legal tender, the value of the cryptocurrency had fallen below $30,000- less than half its all-time high of more than $64,000 just two months earlier.
Internal Opposition to Government’s Decision
According to Laura Andrade, Director of the Public Opinion Institute of the Central American University, the decisions on Bitcoin by the lawmakers was not based on wider consultation among the country and the citizens. A recent poll by the institute found about 70 per cent of Salvadorans did not approve of the new law.
“We see that people do not perceive a positive impact to significantly transform their living conditions,” Andrade told AFP.
The poll also reportedly revealed that almost two-thirds of the survey participants were not interested in downloading the “Chivo” e-wallet which is to be used for buying and spending Bitcoin.
Some groups, however, are exempted from the law. Small business merchants who have no technical familiarity or support can continue with the cash transactions in the USD.
The decision of El Salvador has certainly caused a flutter in the cryptocurrency world and markets in general. While the Salvadorian government is hoping to prop up its economy through this move, the concerns of sceptics about making bitcoin a legal tender are also not unfounded. There is also scepticism of how many of the 70 per cent Salvadorians without access to financial services will actually choose to down the e-wallet and use bitcoin for buying food and ration – which would in turn determine the success of the move.
Another note of importance is what proportion of the remittances sent every year to the country by an estimated 1.5 million ex-pats – and which account for more than a fifth of GDP, will be changed to bitcoin and how financial firms such as Western Union deal with such remittances. The impact of the high volatility of bitcoin on the country’s economy also remains to be seen.