The implications of the El Salvador experiment.
So, El Salvador made bitcoin a legal tender on Monday 6th September by purchasing 400 Bitcoin. The country introduced it to the public in the form of a public currency. What does this mean exactly?
First, let us understand the terms to get a better understanding. A legal tender currency that is accepted in the country. For example, the legal tender of the USA would be the USD, while for India, it is the INR. Bitcoin is a cryptocurrency that runs using the technology of blockchain and is a digital currency. Bitcoin also happens to be a very ‘expensive’ currency, with one BTC being around 46000$.
El Salvador announced in June of 2021 that it would be making Bitcoin a legal tender in its financial institutions. The decision, as with every major economic resolution, was met with lukewarm responses. Tech-savvy Salvadorians were rejoiced, while the common less techy people were opposed to the idea. We will be playing the devil’s advocate and putting the points of both parties in this piece!
After much deliberations and laying out the groundwork, Monday saw the country officially buying 400 Bitcoins. It was officially followed by a purchase of 150 more BTC on Tuesday, taking the total to around $26 million.
So, let us talk economics, shall we? On the surface, 26 million dollars might now look like much for a country with 6.8 million nationals. And comparing it to a GDP(PPP) of over 25 billion dollars, those 26 million look like pennies. Then why is there an outrage amongst the general populace of El Salvador? The 26 million figure is just the government-induced figure. If the population so wishes, they can take the figure to billions.
Alongside introducing digital currency to the republic, the government even launched an app named Chivo, local for ‘cool’, which can be used as a digital wallet for bitcoin purposes in the nation. When transacting, Salvadorians now have the option of using one of the two legal tenders, the old USD (yes, Salvadorians use USD) and BTC. This caveat allows Salvadorians to make Bitcoin easily. An employee can ask their employer to pay them in BTC, a totally legal currency, and the employer might, a totally legal move. This fiasco would lead to some USD diffusing to BTC as time progresses.
This might change the shape of the economy even further, as some small businesses are sure to engage in the crypto sphere. As more businesses take up more of the BTC space, the overall share of the digital currency is sure to shot up.
Then why is the outrage against BTC in the nation? Cryptocurrencies run on the internet. El Salvador has an internet coverage of around 33% (latest data of 2017). This virtually makes it so that two-thirds of the country does not have access to the new currency. The government must therefore integrate it somehow into the traditional banking system. Or a more long-term solution would be to integrate the 66% population in the online circle. This second solution would allow the population to be better connected, thus making the nation more capable overall.
Then there is the problem of old vs new. USD resembles the old guard of the financial world. Bitcoin came forth to the scene very recently, while USD represents the traditional fiat currency. Also, the problem of people not understanding the technology of cryptography and the workings of cryptocurrencies. There must be more information for less tech-savvy people to gulp down the information about the potential successor to fiats like the dollar.
The government led by Nayib Bukele is taking a bold step no matter how you look at it. Bitcoin itself has limitations with some limitations to max transactions per day. A country with a population of 6.8 million would require some substantial amount of transactions to function properly. The technological limitations are the major problem holding the full realisation of this dream. People’s anger would quell in due time. The progress, in that time, must go on.
So, is it a step in the right direction? The ‘diplomatic’ answer would be to say ‘time will tell’! But our gut tells us that it can lead to some major advancements in the financial sector. Just what kind of major changes would it entail? Well…… time will tell!
