El Salvador’s Massive Bitcoin Experiment- What Can We Expect?

Posted by Harshita Kapoor on / October 4, 2021
El Salvador’s Massive Bitcoin Experiment- What Can We Expect?
 

Introduced in 2009, Bitcoin - the first-ever cryptocurrency has frequently caused a stir in the investment industry due to its value and popularity. It is believed to be one of the most reliable and valuable cryptocurrencies in the market.  Due to its controversial and mixed reputation, financial media across the globe has always fervently reported every new exhilarating high and stomach-churning decline in the value of bitcoin.

The dramatic volatility in value has a major impact in the approach and utility of bitcoin and other cryptocurrencies by economic regulators across the globe. Ownership and use of bitcoin and other digital currencies is allowed in most countries, tolerated in many more, while labeled illegal by few regulators.

What Does El Salvador’s Bitcoin Adoption Mean?

Let’s take into account the prevailing approach for the use of Bitcoin in El Salvador. In a historic move, President Nayib Bukele recently announced that it became the first nation to officially adopt Bitcoin as the legal tender.

Legal tender refers to money i.e., coins and banknotes that must be recognized and accepted as payment for a debt if offered. As per El Salvador’s legislation, every economic agent must accept Bitcoin as payment when provided to him by whoever acquires an item or service. The aim behind the decision of the government is to boost the financial inclusion, investment, tourism, innova tion, and economic development of the country. A day before announcing this decision, El Salvador bought 400 bitcoin worth about $20.9 million.

How Does El Salvador Earn Dollars in the Country?

El Salvador has been using the US dollar as its legal tender since 2001. El Salvador's relationship with the United States differs from that of a state or even a territory like Puerto Rico. It is a sovereign country that has chosen to use the dollar rather than issue its own currency. The country is not governed by US laws, and the US government has no authority over it. This means the country’s government cannot print money and does not benefit from Federal Reserve’s money creation.

El Salvador only has 2 options to grow its money - either borrow from the US or earn the dollars it requires. To earn dollars, the country has to export more than it imports and accept international remittances from its citizens earning overseas.

Bitcoin Now a Legal Tender in El Salvador- Is it Good or Bad?

El Salvador currently exports less and imports more, nevertheless, remittances are still sufficient to keep the country's net value of all transactions positive for the rest of the world. El Salvador, as a whole, is getting sufficient net dollar inflows. However, the government debt has climbed to nearly 90% of GDP in recent years, and borrowing costs are increasing alongside. It's uncertain how much more money the government can borrow.

In order to salvage the current scenario, the country has turned towards Bitcoin as the digital currency. Here are the key benefits of Bitcoin adoption for El Salvador.

To Send International Remittances

For overseas workers, using bitcoin to send remittances could be easier, cheaper, and faster than utilizing money transmission services or bank wire transfers, resulting in increasing remittances. Remittances can be then easily converted to dollars once they arrive by using a phone app linked to any cryptocurrency exchange.

Increase the Size of Nation’s Reserves

The Bitcoin adoption as legal tender will allow El Salvador to diversify its dollar reserves into bitcoin reserves. This will provide the country with an opportunity to earn yield and thus increase the size of its reserves.

A Home for Bitcoin Investors

By being the first partially bitcoinized economy, the country can position itself as a home for devoted bitcoin investors. The country can now create an opportunity to develop new bitcoin-based businesses. This can help the country revive its GDP. The El Salvador government has already presented a plan to fuel bitcoin mining with geothermal energy.

Will Bitcoin survive in El Salvador?

Analysts will be able to assess the impact of bitcoin on an economy for the first time as El Salvador becomes the first country to adopt Bitcoin as an official currency. As most countries around the world are experiencing the aftermath of the COVID-19, there is a high chance that most governments would start searching for other sources of revenue. Crypto-assets, in particular, appear to be on their way to becoming the foundation of the next-generation financial system. While weighing the option to accept digital currencies in their countries, regulators are taking in account the key advantages including additional security, traceability, verifiability, and portability of the crypto-assets.

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Harshita Kapoor

Harshita Kapoor

Harshita is a Content Writer at Panamax, Inc. Having pursued MBA in HR and Marketing, she found her calling in Content Writing. She has explored writing in different styles of content including coffee table books, website content, blogs, newsletters, e-books, and media. In her time of leisure, she finds happiness in binge-watching classics and practicing yoga.