Why the El Salvador and Bitcoin marriage may serve up a bittersweet relationship

The cryptocurrency market was taken by storm when a South American country decided to make Bitcoin as legal tender. We are obviously talking about El Salvador, which has been all over the news since it decided to take the crypto route.

 

What has the market made of their decision? Many reputable analysts have considered this move to be a huge win for the pioneer cryptocurrency, while many have begun speculation whether other countries will begin following suit.

 

President Nayib Bukele’s proposal to adopt the cryptocurrency as legal tender was able to win through the congress with a ‘super majority’ taking in 62 of the 84 congress votes. Nayib hailed this move as an effort to promote “financial inclusion”, investment and economic development.

 

Bukele has always been a major activist in the technology section and has, more than once, talked about how fascinating he finds this sector. He became president in a landslide victory 2 years ago and has sought to include more and more of the country’s population in the financial sector, and to him this is a great way to do so, as many people don’t even have a bank account.

 

The use of cryptocurrency together with the U.S. dollar as legal tender will take effect within 90 days, and the market will set the Bitcoin/U.S. dollar exchange rate. Residents of El Salvador will be able to pay taxes in Bitcoin, “any economic participant” will also have to accept it as a means of payment, that is unless they don’t possess the required technology to do so.

 

According to the president, “This will generate jobs and help provide financial inclusion to thousands outside the formal economy, and in the medium and long term we hope that this small decision can help us push humanity at least a tiny bit into the right direction.”

 

Much like many other countries, El Salvador relies on remittances from people abroad sending money to their parents still living in the country, which amounted to $6 billion in 2019, 1/5 of the country’s GDP. Bukele suggested that adopting Bitcoin would make it much easier for such things to happen.

 

As always with big changes like these, there are people who are vocal against such movements. Chief among them is Father José María Tojeira,  who’s the director of the Human Rights Institute at the University of Central America. According to him, this decision is incomprehensible, as many people don’t have access to the internet to make this a viable solution.

 

He said, “It seems more about making a show – which is a characteristic of this government: lots of propaganda, but few structural changes to help the impoverished population.” In agreement with Father Tojeira is David Morales, of the Cristosal human rights group. He has described this movement as a ‘marketing stunt’ and made a point to compare the speed of the decision, which took less than 24 hours to be put into law, with legislation to guarantee water rights or reform of El Salvador’s draconian abortion laws.

 

Looking at this from an economical point of view, Carlos Carcach, a professor at El Salvador’s Superior School of Economics and Business, pointed out that this move is neither convenient nor necessary. He pointed out that the volatility of bitcoin makes it a very poor store of value as people run the risk of becoming extremely rich or extremely poor overnight. Since El Salvador accepts USD payments, it makes little sense for vendors to accept BTC payments which might require them to install new technologies, to which they don’t have access to.

 

Almost 70% of El Salvador’s population lacks access to traditional financial services, so the use of BTC as a means of sending remittances from other countries is patchy at best. This is based on three main factors: Converting local currencies to and from bitcoin is all based on informal brokers, prices are extremely volatile, and buying and selling is a complex process that demands technical knowledge which many Salvadorians lack.

 

Still this is considered to be a major win for the pioneer cryptocurrency. Many financial institutions as well as countries are now monitoring the Salvadorian experiment to see the end result and whether it was successful or not. According to Richard Galvin, who is part of the crypto fund Digital Asset Capital Management, “This could be a key catalyst for bitcoin over the next two to three years.”

(Note: The above thought piece covers the wider VA industry, and may not be an activity that Arabian Bourse Limited (ABX) is looking to be licensed to undertake.

ABX has received in-principle approval from Financial Services Regulatory Authority of Abu Dhabi Global Market (ADGM) and is currently in the process of obtaining an FSP. ABX aims to be the first of its kind fully regulated, virtual asset MTF and custodian in the region focused on institutional and retail investors.)

Related Posts