El Salvador made history last week. It became the first country in the world to adopt bitcoin as a legal tender. In ninety days from now, people in El Salvador will be able to pay for goods and services using the cryptocurrency and no one will be able to refuse bitcoin as payment. Businesses will have to accept bitcoin for any transaction, just like they do with the US dollar. To minimize risk from bitcoin’s volatility, a government trust fund will guarantee the automatic conversion to dollars. This is huge step for the crypto market and testament that bitcoin is not going away, any time soon, even though on countless occasions in the past, it’s been pronounced dead. This is a bold step by a small country, that could drive other nations to follow in its footsteps. This live experiment could serve as case study for bigger countries to see and learn from the mistakes in El Salvador, before they making their step into digital currencies. If this proves successful, then we will see a massive adoption, especially in countries with cash economies, where bitcoin is already the main tender.
Ilias Louis Hatzis is the founder and CEO at Kryptonio wallet.
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El Salvador is the smallest country in Central America with a population of about 6.5 million, and one of the poorest countries in the world. The country’s economy is ranked 104th with a GDP per capita of $4,326. El Salvador’s GDP has remained in the low single digits for two decades and remittances from the U.S. constitute $3 billion annually, about 17% of the country’s GDP. Violence, crime, poverty, corruption and everywhere.
So, why did El Salvador decide to make bitcoin a legal tender?
El Salvador currently uses the US dollar as its official currency. Overall, this system has worked fine for El Salvador, but recently things have taken a turn for the worse. To fight the economic effects of the coronavirus pandemic, the US Federal Reserve dramatically increased the supply of circulating dollars, from $15.35 trillion in February 2020 to $20.26 trillion in May 2021. That’s an increase of 32 percent, unprecedented in modern peacetime US history.
These extraordinary measures have caused Salvadorans to lose purchasing power due to US monetary inflation. When you have to deal in a currency for which you have no control, you suffer with the consequences of third-party decisions, such as interest rates, inflation, GDP, money supply. Argentina tried a similar strategy with the dollarization of its economy, and it failed. Being dependent on a currency controlled by some other central bank, outside your jurisdiction, can only lead to disaster. This is exactly what happened to El Salvador.
How is Bitcoin different?
Bitcoin is predictable with a finite supply, not controlled by anyone. It’s completely decentralized and the supply of bitcoin is capped at 21 million coins, making the digital currency immune to the types of policy changes that affect the US dollar and other fiat currencies. Every 10 minutes 6.25 bitcoins are minted, and 900 bitcoins are released into the market every day. No one can mint more or less bitcoins at will, This is extremely powerful, because it lets governments plan ahead without risk. Try comparing that with the Federal Reserve printing $6 trillion this year. You can’t.
We’ve just witnessed history in the making. What El Salvador has done is very brave, but it’s not without risk. While this is uncharted territory, how much worse could it be when you compare it with the current situation in the country?
With El Salvador making this decision, other countries may follow El Salvador’s lead in adopting bitcoin as legal tender. Most Caribbean nations peg their currencies to the US dollar, and many, like the Cayman Islands, are already well-versed in attracting foreign capital through low tax rates and efficient financial regulation
Already, countries like India are reconsidering their position on cryptocurrencies and I am sure you’ve read articles about nations like China, Mexico, or Canada working on their own cryptocurrencies. I would expect a domino effect with governments all around the world making similar announcements. Partly inspired by El Salvador, and partly in case they actually succeed.
Nothing will ever be the same. The genie is out of the bottle.
El Salvador’s decision has a lot of short-term and long-term repercussions and ramifications on bitcoin’s staying power. Bitcoin’s greatest risk could be its own success. A side effect of El Salvador’s decision could be more regulation for bitcoin. Could the US ban the digital currency if it ever becomes a true competitor to the dollar? Probably. But that would be short sighted. I’ve posted in the past, that Bitcoin could be America’s greatest weapon in its fight against China and not only.
Personally, I find it exciting to live through these changes. The fact that bitcoin is stable and secure enough for a country, no matter how small, to use it as a legal tender is massive. If a few more countries follow suit, the momentum will influence even more to make a same decision and mark a new age in the digital currency’s dominance. This is a one way street and only a matter of time before it happens.
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