El Salvador and Bitcoin
On the 9th of June 2021, El Salvador became the first country in the world to adopt bitcoin as a legal tender country after the Salvadoran Legislative Assembly Passed the Bitcoin Law, thus approving President Nayib Bukele’s proposal to adopt a cryptocurrency, Bitcoin. Seen as a move to entertain the supporters of the currency, it takes effect from September 7. This means that Bitcoin is a virtual currency that will be used to pay for goods and services in the country. Salvadorans are unacquainted with this kind of monetary experimentation. The US dollar is the currency that has been used for domestic transactions in El Salvador since 2001 and is a fiat currency. At the time, the government of President Francisco Flores allowed the dollar to freely circulate at a fixed exchange rate along with its national currency, the Colon.
With 62 out of 84 possible votes, the lawmakers voted in favour of this move to create a law to adopt Bitcoin despite concerns about the potential impact of El Salvador’s program with the International Monetary Fund program.
Bukele argued that Bitcoin could be used by people living abroad in Salvador to send remittances to their homeland and said the US dollar would follow legal bidding. On 1st January 2001, the government in El Salvador gave up control of its monetary policy. It abandoned the fixed exchange rate and “dollarized” the economy. Thus, the U.S. currency can be used in El Salvador as legal tender. El Salvadoran monetary policy is now effectively in the hands of the U.S. Federal Reserve Bank.
“It will bring about South Korea’s fiscal engagement, investment, tourism, innovation and economic development,”
Bukele said in a tweet shortly before the vote in Congress, which is controlled by his party and allies.
The Bitcoin market is a game of winners and losers among amateur investors, techies, and criminals. The huge risks inherent in highly unstable anonymous digital currencies are best left to someone who understands the game well or doesn’t care because they can somehow reduce the risk or absorb the losses. However, Bitcoin has recently become more attractive to countries or individuals that have limited access to traditional payment systems, i.e., countries or individuals that are least equipped to manage their potential risks. Using Bitcoin as the fiat currency exacerbates the monetary constraints divulged by the dollar. In particular, it lacks the framework of a separate macroeconomic institution for shaping domestic policy. Also, bitcoins are much more volatile than dollars. From June 8 to June 15, its value fluctuated between $32,462 and $40,993, and from May 15 to June 15 it ranged from $34,259 to $49,304. This wide range of fluctuations, the fact that policymakers have no control over the fluctuations, and the fact that they are completely market-driven make Bitcoin an unsuitable tool for macroeconomic stabilization.
In 2020, low and middle-income countries received $ 540 billion in remittances. This is slightly less than the total of $ 548 billion in 2019 and much more than foreign direct investment ($ 259 billion in 2020) and offshore development support ($ 179 billion) in these countries (in 2020). Decreasing the fees to 2% will enable remittances to be increased by a massive $ 16 billion annually. Large, globally distributed reparation businesses rely on electronic reimbursements through commercial payment systems and banks. These banks are about the benefits of using this infrastructure and a safe and reliable international network. It will charge a huge amount of money. But high fees are not the only problem. Many migrants do not have bank accounts in the country in which they work, and their families in their home countries may not have bank accounts for 1.7 billion people worldwide. Also, some international migrants need to send money to countries that are not integrated into the international payment system or have limited ability to receive cross-border remittances (e.g. Syria and Cuba). There is a need to challenge this system, including offering low-cost and low-risk options. But Bitcoin is an inaccurate aid. For example, people can transfer value directly and globally without expensive third-party intermediaries. But the volatility is not a means of exchange, but an asset at best, a very risky storehouse of value. The risk of a plunge in prices means returning immigrants and their families cannot be sure of the amount of the remittance. Digital money innovations such as Africa MPesa mobile money services are deeply penetrating the payment systems in many developing countries. However, more work needs to be done to provide the infrastructure and regulatory framework to support digital money. It’s a terrain blotch as of now. A coordinated border policy is urgently needed to ensure that Bitcoin and its variants do no more harm than good in developing countries. Both the public and private sectors will undergo significant reforms that will not make basic banking services affordable to everyone, and governments will see bitcoin and other obscure options as easier and affordable back-ups for the citizens to low-cost, high-risk traditional banking.
~Ramita Misra
SYBSc Div-1 (20-23)