Friday 10 September 2021
El Salvador has become the first country in the world to make Bitcoin legal tender. Will it come to regret its decision?
Hello, I’m Claudia, and this is Sensemaker.
One story, everyday, to make sense of the world.
Today, how one small Central American country is leading a grand crypto experiment.
“I will send to Congress a bill that will make Bitcoin legal tender in El Salvador…”Nayib Bukele, president of El Salvador
That’s Nayib Bukele.
“… in the short term, this will generate jobs and help provide financial inclusion to thousands outside of the formal economy.”Nayib Bukele, president of El Salvador
He’s the populist president of El Salvador.
And back in June, the 40-year old announced a plan to make the cryptocurrency Bitcoin a legal tender.
Just three days later, his plan was approved by Congress.
“The move makes it the first country in the world to officially put Bitcoin on its balance sheet and hold it in reserves…”CNBC News
It’s a bold and controversial move.
The International Monetary Fund has warned El Salvador against adopting cryptocurrencies as legal tender.
They’ve mentioned things like the risks to economic stability, to consumers, and the environment – after all, “mining” for Bitcoin uses lots of electricity.
But Nayib Bukele has pressed ahead anyway.
Citizens can now shop, pay taxes, and buy land with Bitcoin. And anyone with access to the tech will by law now have to accept Bitcoin as payment.
It’s a gamble. So will El Salvador’s bet on cryptocurrency pay off?
Back in 2001, El Salvador adopted the US dollar as its national currency.
And it’s worked pretty well for them since then.
The country enjoyed low inflation, economic stability, and it’s been fairly easy for Salvadorans living abroad to send money back home.
And that happens a lot. Around a quarter of Salvadorans live outside of the country, many of them in the United States. And the money they send back to El Salvador is, well, pretty important to the economy.
“Now this money accounts for around 20 percent of El Salvador’s GDP so is a very significant amount.”Kristie Pladson, DW Business
But there are usually fees involved in sending this money home.
“… and what the president hopes to accomplish by adopting Bitcoin as legal tender is to cut down on the time this takes, on the cost this takes…”Kristie Pladson, DW Business
So, Nayib Bukele hopes that the move to Bitcoin will make it easier for expats to send money home, and it might encourage foreign investment too.
But not everyone is in favour.
[Clip: protesters outside of El Salvador’s supreme court]
On Tuesday, more than 1,000 people marched in El Salvador’s capital against it. They set off fireworks and burned tyres outside the supreme court.
And you can’t blame them. Bitcoin is volatile. Its value, for 1 coin, has varied between $10,000 and $63,000 over the past year alone.
(Claudia narrating): “That is why we say no to Bitcoin because the people will come out of this worse off. Our taxes are being used to set up Bitcoin ATMs. How can it be that the working class are the ones who are supporting and funding the president’s company?Protester speaking to Global News
There’s a lot of scepticism among the public, and it’s understandable. Nayib Bukele’s two brothers are crypto-enthusiasts.
And although they aren’t government officials, it’s no secret that they’ve been leading on negotiations on behalf of the government around everything from a rollout plan to what the country’s digital wallet will look like.
Other countries will be watching what happens in El Salvador pretty closely.
“We’ll have to see right I mean I think this is why this experiment matters if it’s successful and there’s all sorts of metrics that we should I think apply to what that means, not just whether the price of Bitcoin goes up but obviously that is going to be a factor…”CNBC News
Bitcoin enthusiasts have hailed Nayib Bukele’s move as progressive for the future of money.
But the stakes are high. El Salvador is a poor country where the majority of the population don’t even have a bank account, let alone access to the Internet.
And when the cryptocurrency was rolled out this week, Bitcoin fell to its lowest level in nearly a month which, by one politician’s estimate, caused the country to lose $3 million.
Over the course of the day, Nayib Bukele ordered the government to buy $7 million worth of Bitcoin to support its price, that’s on top of the $20 million bought before the launch.
A “new era” was promised to El Salvador when Nayib Bukele was elected.
But he and his brothers are playing fast and loose with the country’s economy and it’s clear that the cost of the world’s first major crypto experiment will be borne by ordinary Salvadorans.
This story was written and produced by Imy Harper.
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