Picture by: Bermix Studio
El Salvador is a small country in Central America with a population of 6.5 million people. The country adopted Bitcoin as legal tender on Tuesday, but was instantly marred by protests, glitches, and a significant drop in value.
President Nayib Bukele’s government created storage app “Chivo Wallet” which allows individuals to make payments in either bitcoin or dollars, was initially not available on major app stores and platforms. They were only able to launch the app on Apple and Huawei platforms towards the end of the day.
Supporters of the initiative argued that using Bitcoin as a legal tender means El Salvador can avoid costly fees on remittance which totaled almost $6 billion in 2020. However, on the day it was launched in El Salvador, the price of Bitcoin plummeted by almost 19%. President Nayib Bukele (who is the driving force behind the initiative) tweeted in optimism as the value dropped, “Buying the dip”.
There are also long-term consequences for adopting Bitcoin as a digital currency. Firstly, it is important to note that El Salvador does not have its own currency, it instead uses the U.S dollar, and adding Bitcoin as a legal tender will complicate the government’s budgetary and tax planning.
Picture by: Al Jazeera website
Another serious consequence of having Bitcoin as a legal tender is that it encourages crime as highlighted by the IMF (International Monetary Fund). “Without robust anti-money laundering and combating the financing of terrorism measures, cryptoassets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and corresponding banks”.
Credit rating companies were also not on board with the decision. Moody’s Investors Service downgraded El Salvador’s debt deeper into “junk territory” which means that it has dropped below an acceptable investment grade. Moody further commented that the country remains likely to experience financial shocks which will make it difficult for the government to repay creditors on time.
The IMF also commented that other countries should follow El Salvador’s steps with caution. “Attempting to make cyrptoassets a national currency is an inadvisable shortcut” warned the IMF.
September 10th | 10:30 AM