Is it cool to adopt a cryptocurrency as a legal tender?
El Salvador thinks so. This month, the small Central American nation became the first in the world to adopt Bitcoin as an official currency. Taxes may be paid in the cryptocurrency and merchants must accept it alongside the US dollar, the national currency since 2001, if they have the technology.
A network of cash dispensers will allow users to convert Bitcoin into US dollars free off commission, backed by 150m Dollar government fund. Salvadorans will receive a free 30 Dollar in a digital wallet called chivo – “cool” in local slang.
Nayib Bukele, El Salvador’s authoritarian president, thinks the move will promote foreign investment and make it cheaper for expatriate Salvadorans to send home billions of US dollars of remittances. The haste of the project is in our opinion remarkable, as Bukele only announced the plan in early June. Three days later, his supporters in Congress passed a brief law late at night allowing the adoption of Bitcoin within 30 days.
Crypto enthusiasts are excited by Bukele’s boldness. A campaign on social media invited supporters to buy 30 U.S. dollars in Bitcoin en masse at the beginning of this month to encourage El Salvador’s move. Bitcoin boosters hope other developing countries will follow Bukele’s example. But not all Salvadorans are happy with this move. Opinion polls show a majority against the idea. This in our opinion may reflect a fear of the unknown as fewer than 10% of Salvadorans understand Bitcoin, according to one survey. Citizens also worry about taking payment in a currency whose value has varied between 10,000 U.S. dollar and 63,000 U.S. dollar over the past 18 months.
Also, the international financial community opposes the plan. The International Monetary Fund (IMF) has warned against adopting cryptocurrencies as legal tender, citing risks to macroeconomic stability, financial integrity, consumer protection and the environment.
The World Bank turned down a request to help advise El Salvador on bitcoin’s implementation as legal tender. Moody’s has downgraded the country debt further into junk territory. The yield on long dated Salvadoran government debt jumped to almost 11% last month.
El Salvador’s move seems in our opinion a bit odd because the country suffers none of the currency turbulence cited by crypto fans as a reason for jettisoning Fiat money. Quite the opposite: the Central American nation has enjoyed low inflation and economic stability since adopting the US dollar 20 years ago. Financial inclusion, an oft-touted Bitcoin benefit surely better served by encouraging fintech neo banks. Their proliferation across Latin America is helping the unbanked access financial services and cutting the cost of many transfers without any of the risks generated by cryptocurrency.
The Bitcoin gambit might in our opinion also be a stalking horse for a longer-term plan to replace the US dollar with a local stable coin, a cryptocurrency whose value is backed by an external asset.
El Salvador’s hasty adoption of Bitcoin is fraught with a certain risk and ordinary citizens are likely to pay the price for their president’s gamble. This is not to oppose innovation: central bank digital currencies (CBDCs), for example, hold much promise in our opinion if carefully implemented. But Bitcoin is not “cool” as a government-backed legal tenders. We believe better options – also in aspect of the environment – have already emerged since the introduction of Bitcoin in 2008.