Image credit: source

While the transfer of bitcoin may not cost much, if anything, the conversion of fiat currencies into cryptocurrencies is, of course, anything but costless and the wild fluctuations in bitcoin’s price – roughly once a month it experiences a daily movement of 10 per cent or more – makes it anything but a stable or efficient medium of exchange.

Salvadoran President Nayib Bukele.Credit:AP

El Salvador, highly indebted (a debt-to-GDP ratio approaching 100 per cent) and tiny (a population of about 6.5 million in a $US25 billion economy) is an unlikely venue for a world-first trial of a cryptocurrency as legal tender. Only about third of the population has internet access and surveys have found that less than five per cent of Salvadorans know what a bitcoin is and that 70 per cent oppose designating it legal tender.

Despite that Bukele has talked up the prospect of the country being a centre for bitcoin mining and cryptocurrency innovation attracted by the experiment.

That experiment has cost El Salvador about $US200 million so far to develop the digital wallet, establish a network of bitcoin ATMs and distribute about $US60 million for the $US30 per head give-away, with another $US150 million dedicated to a fund that will acquire bitcoin. About $US26 million of that fund has been already invested.

The new laws require businesses and banks to accept bitcoin as payment but don’t force individuals to use the cryptocurrency. The US dollar remains an alternate medium of exchange.

How the government, and businesses, will cope with liabilities denominated in US dollars but some revenues in bitcoin – particularly if the app continues to malfunction – will be a critical test of the appeal of cryptocurrencies generally. That mismatch and the sheer volatility of bitcoin, makes a potentially combustible combination.

The attitude of the rest of the world, and the US in particular, will also help determine whether the experiment is successful. The International Monetary Fund and World Bank opposed El Salvador’s decision, raising concerns about the economic and legal risks, not the least of which would be the potential threat to financial integrity in a country with weak money-laundering and counterterrorism financing regimes.


The vulnerability of El Salvador as a haven for money launderers exploiting the new status of bitcoin could attract financial and economic sanctions from the US and others. The US State Department had previously put a number of high-level El Salvadorian government officials on a list of people “credibly alleged” to be corrupt.

Other Latin American countries are watching the Salvadoran experiment closely (Venezuela actually created its own cryptocurrency a few years ago, but it failed to gain acceptance) as will others concerned about the US dollar’s dominance of the global financial system and the influence and power that gives the US over their institutions and economies.

Bitcoin, however, isn’t the answer. A stablecoin, however, might be. Indeed, because the US dollar remains legal tender in El Salvador that is effectively what it has created.

While the government has promised instant convertibility of the bitcoins into US dollars, in effect on conversion the owner of the bitcoins would receive a US dollar-denominated stablecoin.

How that is going to work in practice is unclear but once the infrastructure for a cryptocurrency payments system has been built and digital payments widely accepted, it would be feasible to shift the exchange medium from dollars to some other form of currency – a digital basket of currencies or the return of the Colón, perhaps – and reduce the reliance on the dollar and vulnerability to US sanctions.

The introduction of bitcoin as legal tender isn’t only being closely watched, and cheered on, by cryptocurrency zealots but by many nations that have an interest in shrinking the dominance of the US dollar in the global financial system and reducing the hegemonic power that dominance confers.

El Salvador, however, probably isn’t the best place to run the pilot program to promote their ambitions.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.

(Excerpt) Read more Here | 2021-09-15 19:58:33


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.