On the 7th of September 2021, El Salvador accepted Bitcoin as a legal tender, joining the USD as the second official currency of the country. This is the first time a nation has accepted Bitcoin or any other cryptocurrency as a legal tender. Nayib Bukele, the 40-year-old Salvadoran president, was described as a “young president trying to capitalise on a popular image” with the Bitcoin law. Bukele’s reasoning behind it is to create jobs whilst also claiming it will help Salvadorans save $400 million a year on commissions for remittances and provide an alternative financial service to those without bank accounts. For a country in which 70% of the population depends on money sent home from abroad, this in-theory would make a huge impact due to Bitcoin users being able to avoid the high fees charged by traditional banks and money transfer services.
Despite this, the new law received a mixed reception. A recent poll found that 68% of Salvadorans opposed the move to adopt the cryptocurrency and another poll carried out in August by UCA showed that 9 out of 10 people had an unclear understanding of Bitcoin. This survey also showed that the law would mainly benefit the wealthier cut of the population and the government, widening already high inequality. This is especially contentious considering nearly half of the nation’s population live in poverty and in the rural areas 30% of people live on less than $1.90 a day.
Some described Bitcoin as a distraction by Bukele to divert attention away from the government’s controversial rule and the slow crumbling of the country’s democratic institutions. Others have criticized the government for spending hundreds of millions of dollars buying Bitcoin when the money could’ve been better spent on education or health, especially as over $3M was lost in a market dip on the first day of the legalisation. But not only this, further risks may lie ahead due to the mass conversion of Bitcoin to dollars by the Salvadoran community. Many Salvadorans live at a level of poverty, meaning they can’t account for the volatility of a currency such as Bitcoin. This successive dollar outflow could force El Salvador to borrow from the IMF to fulfil debts and pay for the import of goods. This is problematic due to the fact that, if the guarantees are not there to repay a loan, the IMF will not lend the money.
Now, with the incorporation of the law being over a month ago, we are beginning to see the repercussions. Only the same day as the Salvadoran law was passed, the price of Bitcoin dipped 15% to less than $43,000. This raises the question of whether Bitcoin has a future as a national currency. The Ukrainian government recently met with counterparts in El Salvador after Bitcoin’s legalisation in Ukraine on the 8th of September. The two groups explored ways in which Ukraine could position the cryptocurrency alongside Ukraine’s traditional Hryvnia, following El Salvador’s footsteps. Aside from El Salvador, Bitcoin is legal in several countries but not recognised as a legal tender anywhere else. Its stability is certainly questionable, but despite this, the acceptance of Bitcoin in El Salvador is an encouraging step in the right direction for digital currencies as legal tenders.
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