El Salvador is the first country in the world to accept Bitcoin as legal tender alongside the US dollar. Is this a real innovation or a regression?
Last June, El Salvador announced that it would be the first country in the world to accept bitcoin as legal tender, a currency that would actually work alongside the US dollar, as the country pursues its goal of digitizing finance along with the population. largely unbanked.
While the decision sparked a lively controversy, including some pretty violent demonstrations, it is seen by some as a vital step towards the digitization of finance and a cashless economy. So a very big and profound change is coming.
Why Bitcoin?
The goal was to help stabilize El Salvador’s economy. With over $4 billion coming in from abroad every year, the government wanted to let foreigners who send money not use it. So using bitcoin is a viable option since it can be transferred from one country to another for free, as it has the same value all over the world, although it fluctuates constantly.
When the solution was proposed by President Nayib Bukele, Parliament debated the bill for just five hours with 62 votes in favor of 84. It was then decided to wait 90 days before bitcoin was officially declared legal tender. This brought us to September 7th. But the reception was ultimately very mixed. In particular, due to the failure of the government mobile application Chivo, which could not support the user load. Apple and Huawei also didn’t have the said app at the scheduled time. A big disappointment, especially since the president promised $30 of bitcoin to every citizen who downloaded the app.
Before this big launch, El Salvador bought 400 bitcoins for $20 million, which helped boost its value above $52,000 for the first time since May. A few hours later, the price dropped to $46,561.74. And when the law went into effect in El Salvador, bitcoin fell again to below $43,000. At that time, the government bought another 150 bitcoins for $7 million.
Bitcoin – the solution?
Digital currencies will become the norm in the more or less near future, and it will be around the world. 70% of El Salvadorians are unbanked and do not have access to financial services. The introduction of bitcoin will give these people access to these services that they would probably never have had otherwise. We also need to consider the current situation in the world and how the pandemic has affected countries that use a lot of cash. By adopting bitcoin, people not only gain access to financial services, but can also stop the spread of the virus as remittances disappear from hand to hand.
Since bitcoins are recognized and traded around the world, tourists can also easily prepare. They don’t have to worry about the exchange rate. And if the idea of introducing bitcoin got to other countries, El Salvador would be the first. According to Matt Blom, Director of Sales at EQONEX, “The citizens of El Salvador now fly the crypto flag. The turning point was the use of digital currency to carry out transactions outside the banking system for day-to-day activities.”
Could bitcoin be a problem?
Despite the positive possibilities that this new law may bring, there are also reasons to believe that this law is not necessarily going in the right direction. Prior to its implementation, El Salvador contacted the World Bank to prepare their country for bitcoin. The latter refused the request, fearing the impact of the climate. Bitcoin, like all cryptocurrencies, needs a blockchain to work, and that requires a lot of electricity. Bill Gates also told journalist Andrew Ross Sorkin that Bitcoin “uses more energy per transaction than any other method known to mankind.”
Another issue concerns the fact that many Salvadorans do not have smartphones and therefore cannot access this new application. If the government does not do everything possible to make the service more accessible, the poor will remain poor and will not be able to benefit from these changes.
Supporters of this crypto law will say that 200 bitcoin vending machines have been installed in the country, but once the donated $30 bitcoin is spent, nothing will change for locals who don’t have a smartphone to use the app. And this is especially true since, according to statistics from Trading Economics, only 33.8% of El Salvador’s population has access to the Internet, and sometimes not through a reliable connection. Thus, it would appear that El Salvador has bypassed an important step in its digitization: making its idea accessible.