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This Latin American republic became the first state in the world to give BTC the status of an official means of payment. On the evening of June 8, 2021, the parliament supported the initiative of President Nayib Bukele by a majority of votes. After 3 months, the law will come into force, and the coin will become the second state currency in this country along with the US dollar.
Why does El Salvador need bitcoin?
The area of this small state is only 21,400 square kilometers, and the number of inhabitants does not exceed 6.5 million people. Most of the adult population works abroad, mostly in the US. The total amount of remittances from labor migrants to relatives for the year exceeds $4 billion, which is 20% of GDP. Within the country, more than 58% of the population is employed in the service sector.
It is curious that in 2001 El Salvador abandoned its own national currency, and the US dollar was approved as the national unit of account. Now bitcoin will be added to it. Cryptocurrency will be required to be accepted at all outlets – of course, if they are equipped with the necessary equipment.
This is not the first time El Salvador has blown up the news agenda with an extraordinary decision. So, in 2017, the government of the country was the first in the world to impose a ban on mining – despite the richness of the subsoil. And it considers international tourism to be one of the priority sectors of the economy. However, not entirely successful. The main obstacle to the development of this direction is the high level of crime: in 2015, the country topped the sad rating in terms of the number of murders.
According to the idea of the President of El Salvador, the use of bitcoin as a legal means of payment will contribute to the introduction of innovations in various sectors of the economy, expand the population’s access to financial services and, finally, give a powerful impetus to the development of tourism. Cryptocurrencies do not require opening a bank account, and access to the wallet where they are stored is easy to get with an Internet connection.
Not the last incentive for making a high-profile decision was the opportunity to use environmentally friendly electricity. Most of the country is located in a mountainous area formed by extinct and active volcanoes, and the government expects to provide 100% of the cryptocurrency mining process with green electricity. According to Bukele, the engineers of the state energy company LaGeo have already launched a 95 MW geothermal power plant for mining needs.
The reaction of the world
The news about the legalization of bitcoin by El Salvador as a means of payment was received with a bang only by adherents of the cryptocurrency and the ruling elite of the country. Most economists in different countries perceived the event skeptically at best, if not negatively at all.
So, former US President Donald Trump said that he refers to bitcoin as a new fraudulent project created to oust the dollar from international settlements. Despite the fact that Trump’s influence on the world community has declined sharply since leaving office, he still remains an authority in certain circles of the business community.
JPMorgan analysts also make no secret of their skepticism about the economic benefits of legalizing a digital coin, noting, in particular: “It is difficult to see any tangible benefits for the economy of this country from the adoption of bitcoin as a second legal tender.”
Their opinion was shared by the representative of the International Monetary Fund Jerry Rice, who said: “El Salvador’s decision raises a number of macroeconomic, financial and legal issues that require careful analysis, so we are closely monitoring developments and continuing consultations with the authorities.”
It should be noted that the words of the IMF employee should alert the authorities of El Salvador, given that the state is negotiating with this financial institution to provide a loan of $1 billion.
The Bank for International Settlements, in turn, treated the unprecedented event as an “interesting experiment”, while repeating the opinion about bitcoin as a speculative asset that requires appropriate regulation.
Steve Hanke, a professor of applied economics at Johns Hopkins University, was even more categorical. He believes that ordinary citizens will not use digital currency to pay for goods and services. In his opinion, Salvadorans trust cash more than virtual money, which cannot be held in their hands.
“The decision to legalize bitcoin could lead to a complete collapse of the El Salvadorian economy, as it threatens to withdraw the dollar from the country, as a result of which there will be no money left,” he said.
Hanke is sure that the main motive for the legalization of bitcoin is the desire of political elites to legally convert their own capital into USD.
Therefore, the main beneficiary of the recognition of the cryptocurrency can only be called its holders. Just a few hours after the news appeared, the BTC rate on the world’s largest exchanges jumped by 10% at once.
However, it will be possible to talk about what effect the event will have on the economy of El Salvador itself, at best, only a few months after the law enters into force. If the experiment is successful, other countries will follow in the footsteps of the pioneer, where the population, for various reasons, is also limited in access to financial markets and services.
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