Did El Salvador just turn Bitcoin into real money?

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El Salvador recently approved a law making Bitcoin the most popular legal tender in the world among more than a thousand cryptocurrencies in September. The reaction was immediate, although there was no agreement on the importance of the move. There has also not been much discussion of the important underlying questions of whether a combination of cryptocurrencies will challenge the US dollar as the dominant reserve and trading currency in the world or whether digital currencies non-government could potentially challenge government currencies.

The stakes could not be higher and the cast of characters is mind blowing.

Since the 1940s, the dollar has been the basis of international trade. All countries and their central banks must hold dollars to engage in trade, and the US government has benefited from unique controls over international trade, such as its ability to impose severe sanctions on its adversaries and enemies. Additionally, since the US government controls the supply of dollars, it has the unique ability to manage trade and other deficits by printing dollars. Anything that challenges this arrangement threatens the fundamental characteristics of the stature of the Americas.

Enter cryptocurrencies.

Unlike the Chinese renminbi (RMB) or the EU euro, cryptocurrencies began as private sector inventions to facilitate payments by avoiding the time and cost of currency exchanges, banking, fees. processing companies, credit card companies, etc. As a result, they are widely classified. as financial assets, not currencies, by many governments. However, because they often involve large transfers of assets over the internet, cryptocurrencies require extremely secure and internet-centric processes, the most popular of which is called blockchain.

Thus, internet-centric, blockchain-based private cryptocurrencies have emerged as both investments and de facto currencies.

Enter governments.

For many governments, especially in China, private sector cryptocurrencies pose a threat to the very role of governments and worse yet, a threat controlled by corporations, most of which are American. There is, from this point of view, no role for companies or individuals in the creation of money. Additionally, for these governments and many others, standalone cryptocurrencies when used as an investment represent fraud. Since most private sector cryptocurrencies are not backed by any government currencies, they are, from this point of view, fictitious money that is only worth what a sinister seller or duped buyer will charge and will pay. Nonetheless, standalone cryptocurrencies, including the prime example Bitcoin, have spread and are accepted as a form of payment by a growing number of companies and as an investment by investors around the world.

Enter great technology.

To make up for the fact that many cryptocurrencies are not backed by governments or dollars, some tech companies including Facebook, Uber, Spotify, etc. is exchangeable for cryptocurrency: called stablecoins. Like standalone cryptocurrencies, stablecoins bypass currency exchanges and banking fees, and they offer a global, fast, and inexpensive means of making payments.

Enter Venezuela and Russia.

In order to circumvent U.S. economic sanctions, in 2018, (with reported support from Russia), the Venezuelan government introduced the Petro, which it described as a stable piece of government backed by Venezuelan oil, and it recognized the Petro as currency in Venezuela. In particular, but not just because the Petro is an effort to circumvent US sanctions, Venezuela’s experience has been controversial. And almost certainly not a success, as it is unclear whether any country (except perhaps Russia and Iran) or any major corporation has yet accepted the Petros as a currency. It probably has as much to do with the size and diversity of the Venezuelan economy as it does with active opposition from the United States.

Enter China.

Daily payments in China are not based on cash, credit cards, or banks. They are primarily based on two Chinese RMB-centric electronic payment systems: WeChat Pay and Ali Pay, which have between 800 and 520 million users. These encrypted digital payment systems charge low fees and allow over 1 billion Chinese people to transfer funds or pay for purchases in RMB with their smartphones. Due to the success of these digital wallets, the Chinese government has announced its intention to issue a purely digital RMB (d-RMB.) D-RMB is an online version of RMB money (with virtually no fees) which has been tested in China. . It is likely to be promoted by China as a new form of global currency.

The d-RMB will almost certainly challenge the dollar as a currency for international payments, with d-RMB holders being free to convert their d-RMB into other currencies or spend them in China or other countries.

Enter El Salvador.

With a GNP per capita of around $ 4,000, El Salvador is the smallest country in Central America, but it is the most densely populated. Since the end of its civil war in 1992 (which brought at least a million refugees to the United States), successive governments have pursued different development plans. These ranged from tourism to textiles to making the country’s official currency, the US dollar. But nothing was more important than the $ 4 billion in annual payments made by some 1 to 2 million Salvadorans in the United States to some 360,000 households in El Salvador.

In 2019, Nayib Bukele, 37, mayor of San Salvador, was elected president of the New Ideas Party, which also won a majority in Congress. Although accused of authoritarian tendencies, his approach has partly focused on reducing poverty through technology.

In June, Bukele proposed and Congress approved making Bitcoin their second currency, as it would reduce fees paid by expats who send money home, free the country from exclusive U.S. monetary control, and attract technology investment. . The first two are not in dispute, although the degrees are widely debated; and completely separate risks. Regardless, El Salvador has now made Bitcoin an officially recognized currency in that country.

Whether this is a major milestone in the global acceptance of cryptocurrencies or another small distraction in a much larger economic, geopolitical, and technological struggle likely depends on whether other countries are following El Salvador. to recognize Bitcoin and, more importantly, what is happening as governments led by China. promote their own national digital currencies.

Either way, the United States must be careful.

Roger Cochetti provides advisory and consultancy services in Washington, DC. He was a senior executive at Communications Satellite Corporation (COMSAT) from 1981 to 1994. He also led Internet public policy for IBM from 1994 to 2000 and then served as senior vice president and chief policy officer. Officer for VeriSign and Director of Group Policy for CompTIA. He served on the State Department’s Advisory Committee on International Communications and Information Policy under the Bush and Obama administrations, has testified several times on Internet policy issues, and has served on advisory committees of the FTC and from various United Nations agencies. He is the author of the Mobile Satellite Communications Handbook.

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