El Salvador has become the first country to adopt Bitcoin as legal tender, a real-world experiment that proponents say will lower commission costs for billions of dollars sent home from abroad and boost financial inclusion while critics warn of risks, including around the cryptocurrency’s volatility.
Lawmakers in the Central American country passed legislation in June making Bitcoin legal tender alongside the U.S. dollar, with the law taking effect on Sept. 7.
The country’s president, Nayib Bukele, revealed on Twitter late Monday that El Salvador had just bought another 200 Bitcoin, bringing the country’s holdings up to 400, worth around $20.5 million at current prices.
In order to smooth adoption, El Salvador has launched a Bitcoin wallet app called Chivo, which users can register for with a Salvadoran national ID number and that comes pre-loaded with $30 worth of the cryptocurrency.
“The process of #Bitcoin in El Salvador has a learning curve. Every step toward the future is like this, and we will not achieve everything in a day, nor in a month,” Bukele wrote on Twitter. “But we must break the paradigms of the past.”
Under the new law, businesses will be required to accept Bitcoin to settle transactions and Salvadorans will be able to use it to make tax payments.
Salvadoran authorities hope the move to adopt Bitcoin will save transfer fees on remittances, or the money sent home from abroad. According to the World Bank, remittances to El Salvador totaled nearly $6 billion in 2019, accounting for around a fifth of the country’s gross domestic product.
The government also hopes making Bitcoin legal tender will boost financial inclusion in El Salvador, where around 70 percent of citizens lack access to traditional financial services, according to the Bitcoin law.
Proponents and critics alike are sure to watch the rollout closely and monitor adoption and use. Public opinion among Salvadorans was divided on the move to make Bitcoin legal tender, with nearly 68 percent of the country’s citizens saying they disagreed with its adoption, according to a survey (pdf) by the Central American University. The poll also showed that only 4.8 percent of those surveyed correctly identified Bitcoin as a cryptocurrency while two out of ten had never heard of it.
Salvadoran taxi driver Daniel Hercules told the BBC that he is excited by the adoption of Bitcoin, but also worried about the cryptocurrency’s volatility.
“I’ve accepted Bitcoin for about two months since I knew this was coming. I just had someone pay me $40 in Bitcoin for a fare to the airport but it’s rare. Only around 10 percent of customers prefer to pay with Bitcoin,” he told the outlet, adding that he is using Bitcoin like a savings account rather than converting it to U.S. dollars, citing high conversion costs.
Hercules added that “one of the things that worries me the most” is losing money if the value of Bitcoin falls. A crash earlier this year saw Bitcoin plunge from a record high of nearly $65,000 down to just below $30,000. As of 7:52 a.m. New York time on Sept. 7, the cryptocurrency was trading at $50,986.
The International Monetary Fund (IMF), which provided an emergency loan to El Salvador last year and is negotiating another round of lending, has expressed reluctance around the country’s adoption of Bitcoin as legal tender.
“Adoption of bitcoin as legal tender raises a number of macroeconomic, financial, and legal issues that require very careful analysis. So we are following developments closely and will continue our consultations with the authorities,” Gerry Rice, director of the IMF’s communications department, said back in June.
More recently, IMF chief Kristalina Georgieva said that Bitcoin’s price volatility made it challenging for authorities to make rational fiscal decisions.
“How do we know what we collect in taxes when Bitcoin goes up and Bitcoin goes down? How do we plan for expenditures? Remember in April, Bitcoin crossed $65,000 and then it dropped almost half of it. That is a problem that the Ministry of Finance is going to be wrestling with. And it is not an easy one,” IMF chief Kristalina Georgieva said in late July.
In a July 29 blog post announcing the release of two policy papers on digital currencies, the IMF acknowledged that “opportunities are immense” for digital forms of money, including cheaper transactions and the ability to boost financial inclusion.
“A local artisan can receive payments more cheaply, potentially from foreign customers, in an instant. A large financial conglomerate can settle asset purchases much more efficiently. Friends can split bills without carrying cash. People without bank accounts can save securely and build transaction histories to obtain micro-loans. Money can be programmed to serve only certain purposes, and be accessed seamlessly from financial and social media applications. Governments can tax and redistribute revenues more efficiently and transparently,” the authors noted.
At the same time, they noted a number of risks, including implications for domestic economic and financial stability, with the most far-reaching being implications for the stability of the international monetary system.
“The least stable of the lot, which hardly qualify as money, are cryptoassets (such as Bitcoin) that are unbacked and subject to the whims of market forces,” the authors cautioned.