El Salvador will be the first country to adopt a cryptocurrency, namely Bitcoin, as legal tender. Nayib Bukele, the Salvadoran president, thus plans to have a law enacted formalizing this decision.
President Bukele made this statement at the Bitcoin 2021 conference in Miami. An agreement has, in fact, been reached between the Central American nation and Strike, the digital wallet company. The cooperation’s goal is to develop a contemporary financial infrastructure through bitcoin technology.
El Salvador legislation on the legality of bitcoin
Thus, bitcoin will sit at the same table as the US dollar. Bukele even confirmed that he will send a bill to Congress next week, making bitcoin a legal currency. According to Jack Mallers, founder of Lightning Network Strike, bitcoin is “both the largest reserve asset ever created and a high-level monetary network.”
He continues that this decision would be of great help to developing countries. Holding it would protect them from inflation of fiat currencies. Therefore, this initiative would allow the true potential of bitcoin to be unlocked. It will be possible to use this currency on a daily basis, whether you are an individual or a company in the private or public sector.
Will bitcoin meet the expectations of Salvadorans?
In El Salvador, only 30% of the population has a bank account. So, to make international money transfers, some charge up to 10% of the gross amount. However, most of the time, it takes several days for the money to reach its destination. Worse still, sometimes it requires a physical pickup.
It is important to note that Bitcoin is not backed by a government or a tangible asset. The fluctuation in its value is a result of its scarcity. Indeed, there are only 21 million Bitcoins in the world.
“As usage increases, especially among the younger and less wealthy, this could lead in the long run to a softening of regulations,” Charlie Erith of cryptoasset manager ByteTree tells AFP.
Indeed, the cryptocurrency market remains in small shape. Bitcoin was trading up 4.2% on Wednesday at more than $35,000, recovering after approaching $30,000 the day before but with the price down 46% from its all-time high in mid-April at $64,870.
Why didn’t El Salvador’s announcement push the price higher?
“The announcement effects may have made investors skeptical. As Elon Musk has shown, if they change their minds, the backlash can be harsh,” Erith believes.
The Tesla car company executive had regularly praised cryptocurrencies in the first quarter on his Twitter account, and his company had announced accepting bitcoin as a payment method as well as investing some of its cash in the cryptocurrency. But the whimsical billionaire has since changed his tone and now oscillates between support and criticism, which tends to amplify price volatility.
Most importantly, “there is a risk that El Salvador will become an island in a global sea of cryptocurrency skepticism,” fears Susannah Streeter, financial analyst at Hargreaves Lansdown.
“Cryptocurrency transactions have already been banned in China and the latest target of Beijing are social networks, with the suspension of several accounts dedicated to cryptocurrencies on the Weibo network,” she replied to AFP.
And in the United States, authorities announced earlier this week that they had managed to seize part of the $4.4 million in bitcoins paid in ransom after the Colonial Pipeline hack, which had paralyzed an oil pipeline crucial to the U.S. oil system.
“The hype around this ransom and seizure puts the spotlight back on the idea that one of the main uses of cryptocurrencies is criminal,” the analyst adds.
“By becoming known as a bitcoin haven, the country, which has already seen accusations of corruption, risks attracting the wrong kind of investment from criminal groups seeking anonymity,” she concludes.