For most of its life, Bitcoin (Bitcoin) Is primarily seen as a speculative financial instrument, but El Salvador’s dramatic move to make BTC a legal tender reminds people that cryptocurrency can play a role in elevating the less wealthy citizens of the world.
In early June, two surprising facts emerged on the global stage: First, 70% of El Salvador’s population does not have a bank account, and second, remittances—that is, money sent home by foreign workers—are Come on The economy of El Salvador accounts for as high as 23% of GDP.
In this regard, Chainalysis had a foresight in describing global remittance issues last year. Blog — One might even expect a move like El Salvador: “Given the importance of remittances in the region, Latin America is where we want to see such activities.”
The President of El Salvador, Naib Bukler, Announced that due to the new law, “Bitcoin will have 10 million potential new users in El Salvador”, adding that BTC is “the fastest growing way to send $6 billion in remittances per year.”
The new law is satisfied The doubts of some mainstream economistsHowever, who thinks it won’t work.Steve Hank of Johns Hopkins University even said that it could “completely collapse [Salvadorian] economic. “
But within the cryptocurrency and blockchain communities, this move was praised. Sergey Nazarov, the co-founder of Chainlink, commented to Cointelegraph: “The legalization of Bitcoin as a national currency is a unique and significant event in the history of currency, society and globalization.” Wladimir van der Laan Core developer And the “maintainer” told Cointelegraph that the Salvadoran action “is definitely a milestone, and in a sense, it is something that has never been tried before. I hope it will be the best.”
Eloisa Cadenas, the co-founder of PXO Token, a stablecoin pegged to the Mexican peso, also emphasized the importance of the new law. “It signifies a different way of looking at Bitcoin and the crypto industry. For most of its history, Bitcoin has struggled against the notion that its main purpose is money laundering or’fraud’, while claims of its positive qualities are relatively Less,” she told Cointelegraph. But here, “Bitcoin is helping people who really need it.”
But making Bitcoin a legal tender-which means it can be used to pay taxes, pay off debts, and buy goods in stores-involves certain risks. Eswal Prasad, a professor of economics at Cornell University and a senior fellow at the Brookings Institution, told Cointelegraph:
“Relying on cryptocurrencies with unstable value and high transaction costs as a nationally recognized medium of exchange seems to be a desperate act. For countries where currencies and central banks lack credibility, stablecoins backed by major reserve currencies will Is a better choice.”
Prasad did not rule out all blockchain-related cross-border payment solutions, and acknowledged that “new financial technologies that are expected to reduce international payment costs and frictions are certainly a boon for poor countries that rely on remittances from their citizens working abroad.” , Including “blockchain technology and its variants,” but decentralized cryptocurrencies like Bitcoin are “unlikely to become the main tool for cheap, fast, and efficient cross-border financial transfers.”
What is legal tender?
Fiat currency is a somewhat outdated term that is often misunderstood. It can mean different things in different parts of the world.For example, in the U.S. and U.K., retailers are not The law requires the acceptance of fiat currencies—that is, the U.S. dollar and the British pound, respectively—but retailers in El Salvador must accept BTC payments under the new law.As President Booker explained, as Report Reuters reports:
“If you go to McDonald’s or somewhere else, they can’t say that we won’t accept your Bitcoin, they must accept it in accordance with the law, because it is legal tender.”
Fiat currency basically “means that the government has declared a tax receivable, and it is legal to use this money in contracts and to value goods and services in it,” said Franklin Knoll, a currency historian and president of Noll Historical. (Franklin Noll) said. For consultation, tell Cointelegraph.
A country usually introduces foreign currency as legal tender for three reasons. Noll continued, “The value of the domestic currency fluctuates too much, the domestic currency is short, or the domestic currency is useless in foreign transactions or trade.”
But El Salvador does not have its own currency. It is “dollarized”—that is, all transactions use U.S. dollars—so currency fluctuations or foreign trade are not a problem. “This shows that the problem is cash shortage” and the country’s lack of a banking structure, Noll speculated, and further added:
“It is possible that for some time, Salvadorans have been inclined to use Bitcoin as an alternative currency, which has improved the shortage of cash/electronic cash while providing low-cost remittances. I must emphasize that I am not sure about this.”
Is volatility still an issue?
But as we all know, Bitcoin is very volatile, which may cause some problems. People don’t want to spend BTC when prices are rising, and retailers don’t want to accept Bitcoin when prices are falling. For this reason, the economist John Hawkins, writing In The Conversation, he speculated that “making Bitcoin a legal tender might help destabilize El Salvador’s economy” and added, “If El Salvador adopts a’stable currency’ fixed at $1, things will be simpler .”
Cryptocurrency skeptics (not to be confused with Alistair Milne, a Bitcoin evangelist based in Atlanta, Georgia) and Alistair Milne, a professor of financial economics at Loughborough University, told Cointelegraph that it may also be difficult to find a viable exchange rate.
If the law does not require a specific exchange rate for the U.S. dollar, then according to Milne, “The company will protect itself from the risk of accepting BTC by setting a rather unfavorable exchange rate. […] Therefore, technically, they accept BTC, but no one actually pays with BTC. “
However, if the law stipulates a specific exchange rate, for example, “the average exchange rate 10 minutes before the transaction time obtained from many standard encrypted websites”, then the “cost and risk of the transaction” transaction then falls on the company that receives the BTC” — —Although this may attract those who receive BTC as overseas remittances. Milne continued:
“In the final analysis, even if the law is enforced at a prescribed exchange rate that is beneficial to the buyer, I still doubt whether many transactions in El Salvador will be conducted in BTC.”
Which country might be next?
El Salvador is one of the few countries that does not have its own sovereign currency. Therefore, it will lose less by making BTC legal tender and will not lose “seigniorage”—for example, the government’s profit through currency issuance. So, maybe it won’t have many followers, but Nigel Green, CEO and founder of deVere Group, disagrees. “El Salvador has taken the lead and we can expect other developing countries to follow suit. This is because low-income countries have been suffering for a long time, because their currencies are weak and they are highly vulnerable to market changes, which can trigger rampant inflation,” He says. Say In the press release on June 9.
Will others follow? “There is no doubt,” Cardenas replied, especially those emerging economies, although they may await some preliminary results from El Salvador. “Nigeria may be the next one,” but she also hopes to see her native Mexico make similar promises “due to the large number of remittances entering the country.”
If the share of remittances in GDP is the only criterion, Honduras may also be a candidate. According to data from the Pew Research Center, like El Salvador, its remittances exceeded 20% of its GDP in 2019, “one of the countries with the highest proportion in the world”. In contrast, Mexico accounts for only 3% of GDP, but its total income is very high, at 42.9 billion U.S. dollars in 2020. according to The World Bank is second only to China and India. Most Latin American remittances are sent from the United States.
However, Prasad dismissed the idea that other countries might soon follow suit: “It is extremely unlikely that El Salvador will adopt Bitcoin, and it is unlikely to trigger a wave of other countries adopting cryptocurrency as national legal tender. Decentralized cryptocurrency The shortcomings and inefficiencies are too great to be a viable substitute for the fiat currency issued by the central bank.”
Although Noel expressed doubts about whether many other countries would adopt Bitcoin as legal tender, he stated that “cryptocurrency provides many options for smaller countries to pursue their own monetary agenda, which is tailored to their needs. He cites the Bahamas’ Saudi dollar (the world’s first central bank digital currency) and the Marshall Islands’ blockchain-based currency SOV as examples. He added:
“There is no reason a country cannot establish its own fiat currency stablecoin or adopt existing stablecoins. Therefore, I think the adoption of Bitcoin in El Salvador is a trend, not a milestone.”
More Bitcoin adoption worldwide?
As mentioned earlier, the President of El Salvador predicts that Bitcoin may have 10 million new users due to the law-based on adding Salvadorans working abroad to his country’s population of 6.5 million, some speculate.
Given that there are 71 million According to the Crypto.com report in February 2021, global Bitcoin users—out of 106 million cryptocurrency users worldwide—mean that the adoption rate of Bitcoin from one Central American country alone has increased by 14%. What if some other Latin American countries with a high share of remittances, including Mexico, follow suit? Will there be a surge in encryption adoption?
Chainlink’s Nazarov believes that when telling Cointelegraph, “Just as emerging markets leap directly from fixed phones to mobile phones, I believe that the newly discovered Internet connections in these markets, combined with the Internet’s native features of Bitcoin, DeFi, and smart contracts, make them The ideal place for mass global adoption.” “This is just the beginning of the adoption of Bitcoin, DeFi, and smart contracts in emerging markets, and as the benefits of this historic decision prove to be real, more countries will follow El Salvador,” he concluded Tao.
Cadenas told Cointelegraph that Bitcoin is now evolving into “a common asset used by all socioeconomic classes”, not just the rich, adding:
“It’s great to see that Bitcoin is helping those who really need it. It is creating financial inclusion, not just making money for the company’s finances.”