Controversy: El Salvador makes Bitcoin legal tender tomorrow

El Salvador will make history tomorrow by becoming the first country in the world to adopt Bitcoin as legal tender.

The Latin American nation announced on June 9 that it would be introducing Bitcoin into its mainstream economic system in a statement that has divided global experts on the potential outcome of the move. 

Bitcoin will be in circulation alongside the US dollar, which is already used in seven other sovereign countries.

Some thought leaders believe the initiative will raise the profile of the world’s leading cryptocurrency, resulting in better regulation of decentralised and democratised finance. But others take a more skeptical stance on the decision, with the view that cryptocurrency is too unstable to be used as mainstream tender. 

The risks outlined by some economic experts have even prompted a number of El Salvadorans to take to the streets in protest against the adoption of Bitcoin as an official currency.

Those against the decision say El Salvador's government has framed the directive as a solution that will boost economic development and jobs. However, local opinion polls show that Salvadorians are not happy about the change, and the World Bank has warned against its adoption. Some analysts have also described it as an "attention-seeking move" from an "authoritative regime".

However, if successful, the move is likely to result in other countries adopting cryptocurrencies into their mainstream economies. 

The pros of Bitcoin adoption in brief: 

• El Salvador is already reliant on a first-world currency which is problematic in terms of lending and borrowing
• Being reliant on the US dollar hinders emerging economies
• Adopting Bitcoin could reduce the cost of remittances
• El Salvador could potentially increase its own reserves through the adoption of Bitcoin
• Using the cryptocurrency could increase foreign investment in El Salvador

Better adoption of Bitcoin

According to Nigel Green, chief executive, and founder of deVere Group, a leading financial services giant, the move will be groundbreaking in terms of greater adoption of Bitcoin. He explains, “El Salvador is making history with a bold jump into the future of money – which is, inevitably, digital – by officially recognising Bitcoin as legal tender together with the US dollar.

“Other countries, in particular other Central and South American nations, will be watching with great interest to see if the experiment works to shore up El Salvador’s shaky economy.

“There’s no doubt that there are major risks attached to the decision made by the young maverick president, Nayib Bukele.

“These include that there is a possibility that El Salvador could run out of dollars and that institutions, such as the IMF, might not look favourably on a nation that has adopted Bitcoin.”

Green continues: “However, I’m giving El Salvador’s Bitcoin move a cautiously optimistic welcome for five key reasons

“First, El Salvador chose to be reliant upon a major ‘first-world currency, the U.S. dollar, to complete transactions. But this reliance on another country’s currency also comes with its own set of, often very costly, problems. 

“The El Salvadoran government cannot print its own money and the economy cannot benefit from the U.S. Federal Reserve’s money-printing agenda. Therefore, El Salvador must either borrow or earn the dollars it needs. 

“A stronger U.S. dollar can have a crippling impact on emerging-market economies, such as that of El Salvador.

“By adopting a cryptocurrency as legal tender these countries then immediately have a currency that isn’t influenced by market conditions within their own economy, nor directly from just one other country’s economy. 

“Bitcoin operates on a global scale and is, as such, largely impacted by wider, global economic changes.

“Second, central banks around the world have been devaluing their currencies, while Bitcoin’s supply is not only limited but also new coins are mined at a decreasing rate too. El Salvadorans could, therefore, find their new adopted currency gives them more purchasing power when they buy from overseas.”

He goes on to say that El Salvador's adoption of Bitcoin could cut the cost of remittances, a major source of income for millions of people. The remittances would be made faster and easier too, compared to money transfer services or bank wires, so remittances are likely to further increase. 

Bitcoin opportunities

Green also predicts that by diversifying the nation’s dollar reserves into the cryptocurrency, there could be additional opportunities to earn yield, meaning the size of the reserves would grow. El Salvador could benefit from significant foreign investment and capital inflows as digital asset organisations are likely to relocate to the Bitcoin-friendly nation.

If the adoption proves to be a success it will be a massive step for Bitcoin’s mass adoption as other countries will follow El Salvador’s lead.

He says, “Due to their similar reliance on remittances, amongst other factors, other nations, including Panama, Guatemala, and Honduras, could also adopt Bitcoin should the process in El Salvador run smoothly and there’s greater economic growth, stability, and levels of financial inclusion as a result.”

Green adds, “We’re giving a measured welcome to the move that could make a hugely positive impact on this Central American nation and its population. This is truly a landmark moment in the evolution of digital currency.”

Main image: AFP/Getty