[ad_1]
By Tom Wilson and Karin Strohecker
LONDON (Reuters) – El Salvador became the first country in the world to adopt bitcoin as legal tender, with President Nayib Bukele touting its use for its potential to help Salvadorans living abroad send money home.
Here’s what the move means for bitcoin as the dominant currency – and emerging markets like El Salvador:
WHAT THE LAW SAYS?
Salvadoran law means that bitcoin will be on a par with the dollar, which became its official currency 20 years ago.
Making bitcoin “legal tender” means that stores and businesses must accept it for goods and services, and they can choose to express prices in currency.
Taxes can also be paid in bitcoin, although its use is optional.
WILL BITCOIN BE USED LIKE DOLLARS?
It is too early to tell.
Bitcoin’s value has fluctuated wildly over its 12-year lifespan, with regular double-digit daily price movements making it impractical for trading.
It remains little used to purchase goods and services around the world, despite a growing number of large companies accepting it as a means of payment.
El Salvador said the bitcoin-dollar exchange rate will be set by the markets. Yet no details have been given on how this will work in practice and whether and how suppliers and companies will reflect prices in real time or perhaps through other mechanisms.
The government guarantees convertibility into dollars at the time of the transaction through a $ 150 million trust created at the country’s development bank.
IS BITCOIN REALLY A CURRENCY NOW?
Bitcoin was designed as a currency, but many investors see it as an asset closer to gold than a replacement for the dollar, euro, or yen. Financial regulators and law enforcement around the world are debating the status of cryptocurrencies and how they should be regulated.
The jury is still out on whether the introduction of bitcoin to El Salvador will see it become more of a transaction mechanism or take on the function of currency in its own right.
The story continues
IS THIS THE BEGINNING OF A BIGGER TREND?
In theory, bitcoin offers a fast and inexpensive way to send money across borders without relying on traditional financial firms such as banks and money transfer companies.
Donors say this could spill over into emerging markets in particular, where people don’t have access to traditional financial services and have to pay expensive fees to send and receive money.
Still, converting bitcoin to and from local currencies in these economies tends to rely on informal brokers, requires know-how, and carries the risk of scams and price fluctuations.
Analysts say it’s too early to say whether El Salvador’s move would trigger a wider trend in bitcoin adoption.
HOW WILL THIS ACHIEVE IN EMERGING MARKETS?
El Salvador’s experience will provide the first opportunity for analysts to assess the impact of cryptocurrency on an economy.
Some warn that the increased use of cryptocurrencies will reduce the effectiveness of monetary policy.
While El Salvador already uses the greenback as legal tender, other emerging economies that are on the cusp of dollarization might find that the use of cryptocurrency can amplify this, hampering the ability of central banks to act as lender of last resort.
Inflation is also the center of attention.
Bitcoin – like many other cryptocurrencies – has a limited supply designed to mitigate inflationary effects. But experts predict that any growing business case for cryptocurrencies could spur new creation, meaning the aggregate supply is not limited and turns out to be potentially inflationary.
(Reporting by Tom Wilson and Karin Strohecker; Editing by Chizu Nomiyama)
[ad_2]
picture credit