El Salvador is a small Central American country that until recently used the US dollar as its official currency. In early June 2021, the government passed the law according to which Bitcoin received the status of a legal tender.
The technology integration process lasted for almost 3 months and was completed on September 7th. After that date, the cryptocurrency began to circulate in the country as a full-fledged payment method. Thus, El Salvador became the first country in the world to recognize Bitcoin as the official currency.
Very charismatic and popular president Nayib Bukele is one of the big proponents of this initiative. In his speech mentioned as follow: "As a result of this step, we expect a sharp increase in economic growth and a reduction in the cost of international transfers of funds sent by the Salvadorans who work abroad." He also stated that about fifty thousand Salvadorans are already using Bitcoin.
These are expected advantages
At the request of Bukele, a study was conducted to calculate the savings on transactions by introducing cryptocurrency. The research concluded that the citizens of El Salvador could save more than $ 400 million on commission fees annually.
Throughout 2020, one and a half million Salvadorans working abroad sent $ 5.9 billion to their homeland, which is 23% of the country's GDP. This figure is the highest in the world. At the same time, transfers through banks take more than one day and commission fees are charged for each transaction.
Mike Peterson, the director of the Bitcoin Beach project aimed at promoting cryptocurrencies in El Salvador, said in a report that most Salvadorans do not have bank accounts and access to payment applications. And easy access to digital currencies will provide them with the following capabilities:
- Make online payments;
- Transfer money to any destination in the world within no time;
- Minimize transaction fees
Mr. Peterson has no doubts that it will take a short time to see the positive effect. Salvadorans already can feel real benefits from the law, that grants Bitcoin the status as a national currency.
Every citizen can install on his smartphone an application developed specifically for this purpose. And a cryptocurrency will be transferred to the virtual wallet, at a cost equivalent to thirty dollars. It is not yet available on Google Play or the App Store, which greatly annoyed the President of El Salvador.
Just before the recognition of Bitcoin as the national currency, El Salvador acquired 400 BTC, paying about twenty million dollars for acquisition. This action has led to a sharp increase in the price raising it to the level of $52,000. However, after a few hours, when the risks associated with Bitcoin became clear to investors, the price fell to $ 50,000. And over the next few days, the price of the main cryptocurrency dropped to $ 46,000.
More than 200 ATMs have already been installed across the country, allowing to convert Bitcoins into dollars. There is a $0 commission for the transaction. In order to prevent acts of vandalism, which can be expected from opponents of the "bitconization" of the country, the military has been assigned to some ATM locations.
A campaign in support of El Salvador has been launched on social networks Reddit and Twitter. Within its campaign, each participant is invited to purchase Bitcoins for $30.
The introduction of Bitcoin did not find immediate support from most people of El Salvador. According to the data obtained as a result of surveys, about 70% of the country's population does not understand how cryptocurrencies work, and this causes distrust. Frequent and sometimes quite sharp fluctuations in the Bitcoin price only adds fuel to the fire.
The attitude of the financial world
Doubts about the sustainability of the law adopted by El Salvador were expressed by world-class financial analysts. Among them are experts from the IMF, World Bank, and other reputable organizations.
According to experts, this may have a negative impact on the decision to provide the country with a billion dollars in loans, the underwriting of which was planned by the IMF. Also, there is a downgrade of El Salvador's credit rating by Moody's, and this will certainly adjust the value of its debt obligations.
The popular London newspaper Financial Times, which is very reputable in the business community, published an analytical commentary with a skeptical assessment of these events. The publication's specialists draw attention to the fact that since the transition of El Salvador to the dollar, the country has had a low inflation rate and stable growth. This trend continued for 20 years and was interrupted by the Covid-19 pandemic.
The newspaper believes that the reason for the decision on Bitcoin should not be attributed to the desire to improve the economy. The possibility cannot be ruled out that the hipster enthusiasm of the young El Salvadorian leader in the adoption of cryptocurrency is needed to achieve totally different goals. According to some experts, Nayib Bukele is using the new law as a political maneuver. In this way, he tries to divert public attention from his attempts to change the judicial system. And if he succeeds, he will be able to be re-elected as a president.
Another possible scenario, according to the Financial Times, is that the adoption of Bitcoin is only the initial stage of a long-term plan. Its ultimate goal is to introduce its own virtual currency. Foreign assets will serve as collateral for this stablecoin. And as a result, this will allow to completely oust the dollar from the country's economy.
Summing up, we can say that, according to experts, the result from the recognition of Bitcoin will be disastrous. Regardless of what the President of El Salvador was motivated by in making this decision. The haste with which the legislation regarding cryptocurrency was carried out is extremely risky, and the consequences of this will be a heavy burden on the shoulders of ordinary Salvadorans.
However, there is information that the leadership of some countries in South America has already shown interest in this experiment.