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El Salvador could become the first country to officially accept a well-known cryptocurrency. According to CNBC, President Nayib Bukele has said he will propose a bill making Bitcoin legal tender alongside the US dollar. The government would team up with digital holding company Strike to create a financial framework around the digital currency format.
Strike founder Jack Mallers claimed that Bitcoin would help countries like El Salvador hedge against inflation “potential shocks” to traditional currencies.
The bill is expected to pass when Bukele’s party controls El Salvador’s Legislative Assembly.
This move may not be as daring as it sounds. CNBC notes that migrant remittances make up around 20 percent of El Salvador’s gross domestic product and often include high transaction fees as well as long delays. Bitcoin and other cryptocurrencies could make these transfers more convenient and immediate. Residents certainly love digital payments. Strike’s app became one of the country’s most popular apps when it launched in March.
This nevertheless represents an important bet. Bitcoin is neither backed by a stable resource like gold nor by the government of a large country. Like other cryptocurrencies, these are huge, highly volatile peaks and drops that are often tied to events that would be considered minor elsewhere. A resident relying on a Bitcoin transfer to make ends meet could be devastated if the value drops without warning.
Merely initiating crypto payments is not a guarantee of success either. Venezuela did not go very far with its Petro currency, although it was primarily intended as a circumvention of international sanctions. It’s also linked to oil, which has had its own volatility thanks to the COVID-19 pandemic.
If El Salvador’s decision is successful, however, it could give Bitcoin and other cryptocurrencies another foothold in the traditional financial world by making it easier to do business with an entire country. Don’t expect other countries to harmonize on Bitcoin. The US Federal Reserve, for example, is studying its own digital currency. Salvadorians might still have to deal with exchange rates and other issues, even if a fully digital currency would eliminate some of their other challenges.
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