El Salvador’s troubled Bitcoin experience draws attention

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A Chivo employee helps a person use a Chivo ATM, a bitcoin digital wallet that the Salvadoran government has launched for the use of bitcoin as legal tender, in Antiguo Cuscatlan, El Salvador, September 17, 2021. [Photo/Agencies]

Weeks after El Salvador became the first country in the world to adopt Bitcoin cryptocurrency as legal tender, the experience has already run into problems.

A law that came into effect on September 7 requiring all businesses to accept Bitcoin payments has sparked street protests in this small Central American country, which has 6.5 million people. There were also long lines at ATMs as people rushed to withdraw US dollars, the official currency since 2021.

The start of the experiment also coincided with declines in the still volatile Bitcoin’s value, driven in part by the central bank of China decision to declare all cryptocurrency transactions illegal. The Salvadoran government has already lost $ 5 million out of the 700 Bitcoins it purchased to launch the initiative.

El Salvador’s move, which mainstream economists warned in advance could end in disaster, comes at a time when monetary authorities around the world are grappling with how to deal with the rise of Bitcoin and a multitude of rival virtual currencies.

It also coincides with a trend that residents of other fragile economies, notably Afghanistan and Lebanon, are turning to virtual currencies as a safe haven to house their money.

The Salvadoran government of President Nayib Bukele, a 40-year-old former business executive, offered every Salvadoran citizen a $ 30 credit to encourage them to download a virtual Bitcoin wallet that they could use for their purchases.

Many responded by rushing to ATMs to convert the credits into what they clearly saw as the most reliable dollar, which remains legal alongside Bitcoin. Others were content to sell their credits for $ 25 or less to buyers on social media.

The race for dollars was the flip side of Bukele’s boast that more than 2 million Salvadorans were already using the government’s Chivo virtual wallet.

One of the theoretical advantages of adopting Bitcoin is that it offers Salvadorians a quick and inexpensive way to receive money from family members abroad. These remittances represent about 20 percent of the country’s GDP.

However, among the many drawbacks is the fact that cryptocurrencies are at best unregulated and at worst a medium for crime, corruption and fraud.

According to American economist Jeffrey Frankel, “cryptocurrencies seem to serve a function: to facilitate illegal transactions”.

Frankel acknowledged that El Salvador had already accepted a loss of influence over national monetary policy when it adopted the United States dollar as its currency 20 years ago. “The costs would be even greater if a currency as unstable as Bitcoin were the only national currency. “

China’s recent crackdown on cryptocurrencies has cited the risks to individuals as well as organizations operating in the virtual money market. According to the People’s Bank of China, the central bank, speculation in cryptocurrencies has disrupted the economic and financial order and encouraged criminal activity, money laundering and pyramid schemes.

Governments and the banking industry, meanwhile, are under pressure to develop their own virtual currencies to compete with the speed, cost and convenience of unregulated crypto transactions.

China has launched a digital yuan test program ahead of the 2022 Winter Olympics, while central banks in Europe and the United States are already considering adopting digital versions of their currencies.

In the meantime, some investors in volatile economies are turning to unregulated cryptocurrencies in an attempt to protect their wealth in the face of uncertainty. The Taliban takeover of Afghanistan has seen an increase in the use of crypto as those with the money seek a way to preserve it or transfer it overseas. In Lebanon, a currency crash prompted people to invest their savings in digital currency.

Other countries are monitoring the outcome of El Salvador’s experience before deciding whether to follow suit. Ukraine and Cuba have shown interest, while Panama is already considering a crypto bill that promotes virtual currencies as a hedge against inflation.

Early indications of El Salvador’s struggling initiative are that such experiments may fail in the face of public unease at relying on unregulated currencies.

However, the benefits of a reliable virtual currency are many, and central banks are sure to continue their crypto reforms. The Bahamas introduced a central bank-backed version of the Bahamian dollar last year to avoid having to move physical money between its many islands.

The ideal outcome, at least for ordinary employees and consumers around the world, could be an updated transaction system that offers all the benefits of high technology without the drawbacks of unregulated cryptocurrencies.

Harvey Morris is a senior media consultant for China Daily UK.

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