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Bitcoin becomes legal tender in El Salvador

On 7 September, El Salvador made history by becoming the first country to classify bitcoin as legal tender.

The cryptocurrency has officially become the Central American country’s national currency alongside the US dollar, with president Nayib Bukele (pictured) taking Twitter to provide support for the transition.

According to Reuters, the El Salvador government bought a total of 400 bitcoins ahead of the formal adoption, gifting every Salvadoran $30 in bitcoin that could be used to shop and pay their taxes.

The country has partnered with digital finance outfit Strike to build the infrastructure required, including a digital wallet called Chivo, which supporters say makes it easier for people to access their finances rather than through traditional bank accounts. In addition, it hopes that bitcoin will make it easier to send remittances from the Salvadoran diaspora in countries like the US.

400

Number of bitcoins the El Salvador government bought

  

However, the launch did not go smoothly as technical problems meant Chivo could not be accessed on mobile platforms, including Apple [AAPL]. It also struggled with the high number of user registrations and had to be taken offline.

Concerns over volatility, people’s access to the technology and the potential for criminal transactions saw the price of bitcoin fall by 13% to around $45,000.

 

A new currency era

It appears that Moody’s warning in July that bitcoin had put the country’s debt rating deeper into junk territory was coming home to roost. Moody’s had said then that making bitcoin legal meant it could be harder for the government to repay creditors because of the currency’s volatility.

Despite this, Ukraine has decided to forge ahead with legalising all virtual financial assets, including bitcoin. This does not make it legal tender or on a par with its own national currency, but it means it can legally regulate bitcoin.

“The development of a new industry will allow attracting transparent investments and will strengthen the image of our country as a high-tech state,” Mykhailo Fedorov, Ukraine's vice prime minister of digital transformation, said.

Panama has also just introduced a bill to make bitcoin legal tender.

“Other countries, in particular Guatemala and Honduras, will be watching with great interest to see if the experiment works to shore up El Salvador’s shaky economy. There are major risks including the possibility that El Salvador could run out of dollars and that institutions, such as the International Monetary Fund, might not look favourably on it” - Nigel Green, chief executive and founder of deVere Group

 

More nations will follow, argues Nigel Green, chief executive and founder of deVere Group. “El Salvador is making history with a bold jump into the future of money – which is, inevitably, digital,” he said. “Other countries, in particular Guatemala and Honduras, will be watching with great interest to see if the experiment works to shore up El Salvador’s shaky economy. There are major risks including the possibility that El Salvador could run out of dollars and that institutions, such as the International Monetary Fund, might not look favourably on it.”

He also likes the El Salvador move because relying on a strong US dollar can have a crippling impact on emerging market economies. “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,” he said.

“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. Salvadorans could, therefore, find their new adopted currency gives them more purchasing power when they buy from overseas. El Salvador could benefit from significant foreign investment, and capital inflows as digital asset organisations are likely to relocate to the bitcoin-friendly nation.”

 

Cashless or collapse?

Although it is unlikely that major economies such as the UK would make a cryptocurrency legal tender any time soon due to its volatility and lack of control from a central bank, there are an increasing number of countries looking to launch their own digital currencies.

As of 14 September, the price of bitcoin is at the $45,000 mark, down from highs of $63,000 in mid-April. But it remains attractive in the new digital economy. Indeed, it is still well above the $10,000 it was sat at this time last year.

Standard Chartered sees the price flying as high as $100,000 by early next year and $175,000 in the long-term.

“As a medium of exchange, Bitcoin may become the dominant peer-to-peer payment method for the global unbanked in a future cashless world,” its new crypto research unit said.

“As a medium of exchange, Bitcoin may become the dominant peer-to-peer payment method for the global unbanked in a future cashless world” - Standard Chartered

 

But there is also the prospect of growing regulation. In the $1trn US Infrastructure Bill, brokers of digital asset transactions will have to report their customers to the Internal Revenue Service to be taxed. The Securities and Exchange Commission has said that crypto platforms need more regulation, and the EU is introducing stricter regulations on cryptocurrency transfers and data access. There are also concerns over the sustainability and environmental impact of bitcoin mining.

Sweden’s central bank governor, Stefan Ingves, believes that bitcoin could eventually crumble. “Private money usually collapses sooner or later. It’s comparable to trading in stamps,” he said, according to Bloomberg.

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