El Salvador has become the first country to adopt Bitcoin as a legal tender. In doing so, El Salvador has denounced the dollar, the foster child of fiat currencies. Within hours of this news breaking out, Nayib Bukele, the president of El Salvador, has also been projected as the spokesperson for cryptocurrencies. Let’s decode the larger implications and apprehensions around this move and in the future.
Decentralization and putting fiat out of business.
Ever since the adoption of the Bretton Woods system, the dollar has enjoyed its dominance as the most powerful currency in the global economy. Interest rate changes by the federal reserve show ripple effects in countries across the world. Not to mention the 2008 Global Financial crisis that broke the world economy. Dollar still enjoys such influence worldwide, but El Salvador’s adoption of Bitcoin as a legal tender comes as the first governmental move towards a more decentralized world economy. Not just that, this has legitimized the movement towards decentralization. This is less of a move towards bitcoin but more of a move away from the dollar. However, this adoption of bitcoin as a legal tender has opened the doors for more countries to follow suit. Therefore, the general outlook towards cryptocurrencies has become favorable. We expect more countries to adopt cryptocurrencies as legal tenders. The conditions in the rest of the world may not be as favorable as they were in El Salvador for bitcoin adoption. However, there is a strong incentive for GDP growth to any speculator country.
El Salvador, who?
El Salvador is a small country in Latin America with a population of 6.5 million people. However, it’s richer than India and enjoys a per capita GDP twice as much as India’s. A closer look shows that El Salvador is a place of crime, poverty, and wealth inequality. However, there has been a considerate reduction in poverty since the past decade and increased efforts to provide quality education. It has a better life expectancy than India’s. Overall, the country is on the move to uplift more people from poverty and move towards financial inclusion.
Adoption of bitcoin: welfare gain or profit-seeking?
Financial inclusion is a necessity in a country where informal financial services are the norm (which often leads to violence). However, the adoption of bitcoin seems like a pipe dream. 70% of the population of El Salvador does not possess a bank account. Therefore, it is not certain that the adoption of bitcoin will allow for financial inclusion when most people are illiterate.
However, El Salvador is set to benefit a lot from efficient and decentralized cross-border payments. In 2019, El Salvador remittances made up about 20% of its GDP. Inward remittances play an important role in the GDP of El Salvador. They have remained consistent between 2001 and 2021. This heavy dependency on remittances favored the adoption of bitcoin as a legal tender.
Moreover, in absolute terms, family remittances from the United States to El Salvador grew from $1.6 billion to $5.9 billion in 2020, about 22% of the country’s GDP. This is a huge portion of El Salvador’s GDP as compared to other countries across the world. Bitcoin adoption seems like a solution to the government rather than a public welfare policy. It's convenient.
After 20 years of dollarization, a new panacea is being peddled. This time it is not US Dollars but Bitcoin that will lead to the promised land. Sound familiar?
Is this step all green and good?
While the crypto enthusiasts might see this step as a milestone in the crypto world, El Salvador has indeed exposed itself to the volatility of Bitcoin. The extreme volatility of Bitcoin and the influence that people like Elon Musk and other giant market whales have made Bitcoin a very risky currency. If there is any chance that Bitcoin’s volatility will be like the volatility of oil prices faced by Venezuela, then El Salvador might be in a lot of mess. Venezuela had become a petrostate and correlated its economy with oil prices; El Salvador is connecting its economy with Bitcoin. Just as in El Salvador, the wealth was unequally distributed in Venezuela, and the system was full of corruption. Venezuela’s economy went into a spiral when the oil prices crashed (from $100 a barrel in 2014 to $60 a barrel in 2016). Therefore, such dependence on a volatile commodity can be a bane. We may see shocking statistics in the future, full of ups and downs
Imagine crypto as the internet back in the late 1990s. Two decades down, it’s no more luxury rather a necessity.
Prince Dhaka, Research Analyst at Moving
Ira Pandey, Content Strategist at Moving