Bitcoin became the official national currency for the first time. The 40-year-old president of poor El Salvador decided to put this risky experiment on his population. He even ran a public service advertisement explaining the benefits of the new currency to people. What benefit will Salvadorans with an average salary of $ 100 a month get from a currency, one coin of which costs more than $ 50 thousand?
The first country has appeared in the world where bitcoin will be used as a new national currency along with the US dollar. This is a poor Latin American state of El Salvador, whose young president Nayib Bukele decided to “hyip”.
Of course, Petro e-money already exists in Venezuela, and the Bahamas launched the Sand Dollar digital currency backed by the central bank this year. Even in Russia, a digital ruble may appear. However, El Salvador did something different.
“It is worth distinguishing between two concepts: legalization of bitcoin as an acceptable means of payment and its legalization as a new national currency. Quite a few countries have done the first, keeping the national currency, but only El Salvador has done the second. The reason is the depressing state of the economy. In fact, the new law is an attempt to provide defibrillation to a patient who hardly breathes, ”says Janis Kivkulis, lead strategist at EXANTE.
The country bought 400 bitcoins for $ 20 million before officially launching the new means of payment in the country. After Bukele announced the purchase of another 200 bitcoins by the country, later – another 150 bitcoins. On the Coinbase crypto exchange, bitcoin first rose in value, but then quickly went down. Bukele bought bitcoins amid a collapse in their value. It even caused a major crypto exchange to malfunction.
The 40-year-old president’s plan is as follows. Businesses now have to accept bitcoin on a par with the dollar in exchange for goods and services, and the government – when paying taxes. To support transactions, the local Ministry of Finance created a $ 150 million fund in a state-owned bank.
In order to introduce bitcoin to the public, the government created the Chivo bitcoin wallet, which is provided with a pre-loaded $ 30 currency for users. The wallet owner is registered under the national identification number of El Salvador. There are 200 bitcoin ATMs installed across the country that can be used to exchange cryptocurrencies for dollars. The authorities even launched public service announcements about how to pay well with bitcoin.
The whole world will now follow with interest this financial experiment. “It looks like a brave new world. After launching this project, we found ourselves in uncharted territory, but I’m glad this experiment is happening in general, and I think it will teach us a lot, ”says Garrick Heilman, head of research at Blockchain.com in Miami, to Bloomberg.
The President of the country believes that this will attract more people to the financial system and reduce the cost of remittances. And these tasks can indeed be accomplished.
El Salvador is a poor country, so its residents go to work in other countries, mainly in the United States. And remittances from labor migrants are the most important inflow of dollars into the country. In Ukraine, for example, the same scheme operates.
Last year alone, migrants sent home $ 6 billion – this is a fifth of El Salvador’s GDP. Thanks to Bitcoin, they can save as much as $ 400 million a year in fees for these transactions. This is a benefit for the state as well, as local residents will spend this additional 400 million dollars domestically.
But the main benefit of the country will be different. Apparently, the El Salvadorian authorities hope to become a new offshore paradise for the whole world. Given that bitcoin is poorly regulated and its owners are anonymous, El Salvador could turn into a money launderer. Moreover, the country risks becoming a Mecca not only for tax-evading businessmen, but also for criminal elements.
“The digital currency is decentralized and difficult to control. Some transactions are still free to pass with complete anonymity, which creates high risks of financing criminal activities, ”says Alexander Kuptsikevich, lead analyst at FxPro.
If large and rich economies cannot afford such a “luxury”, then poor El Salvador decided not to deny himself anything: there is nothing much to lose.
World rating agencies did not like this approach. Immediately after the approval of the bitcoin law, the rating agency Moody’s downgraded El Salvador’s creditworthiness, and its dollar-denominated bonds also came under pressure. Fitch fears a decline in the creditworthiness of the country’s insurance companies, which are already not in the best position.
Many experts believe that such a move by El Salvador will prevent it from concluding an agreement with the IMF on a $ 1 billion loan.
“Another disadvantage of bitcoin is the lack of a physical medium. Paper dollars can be withdrawn from an ATM and paid for goods and services in places where contactless payment is impossible, and there are still plenty of such places not only in Russia, but also in Europe, ”says Kuptsikevich. Plus, digital currency is not backed by anything and is a purely speculative instrument. “To put it even simpler, bitcoin owes nothing to anyone. It may cost one dollar per coin, and there will be no one to make claims, ”the expert adds.
Finally, what ordinary Salvadorans fear most is perhaps the instability of the exchange rate. Volatile bitcoin can hit the well-being of both ordinary citizens and financial institutions, says Kivkulis.
“Today you have one bitcoin, and you are the“ king of the world ”with 100 thousand dollars, and in a couple of weeks your cryptocurrency can only be changed for 20 thousand dollars or even less. No resident of the country will definitely like this if, say, he receives a salary or pension in bitcoins, ”
– says Kuptsikevich. Unsurprisingly, local polls show that the majority of Salvadorans do not support the emergence of a new official currency – bitcoins.
El Salvador has extremely low internet penetration, which will make it difficult to access digital currency, Kivkulis said. “Most of the locals do not even have a bank account, and the average income reaches a maximum of $ 100 per month. Therefore, it is impossible to say unequivocally whether bitcoin will be popular among the local population, with its current cost of more than 50 thousand dollars, ”says Tatyana Skryl, associate professor of the Department of Economic Theory of the PRUE. Plekhanov.
At the same time, El Salvador is an experimental testing ground that will show whether a decentralized currency can strengthen the economy of a country that has always suffered from dollarization: a large external debt in dollars, the penetration of the American currency into the country’s internal life, says Kivkulis. That is why El Salvador may not be the only one; other Latin American countries are on the way.
For richer countries, such a step is, of course, more risky. “If we assume that Russia decided to replace the ruble with bitcoin, then this would create huge uncertainty about the country’s economic future, as well as frighten investors and cause a powerful outflow of capital from the country,” the source concludes.