Bitcoin in El Salvador: Are cryptocurrencies going mainstream?

Via Matthew Sparkes

El Salvador has officially accepted bitcoin as legal tender. The draft law could soon put Panama on a similar path, while China, the US, and the UK are investigating the launch of their own cryptocurrencies. Here’s what you need to know.

Why are countries adopting bitcoin?

President Nayib Bukele hopes bitcoin will alleviate El Salvador’s toughest economic problems: citizens sending money back home from abroad make up a fifth of the country’s GDP, but they have to pay high transaction costs and 70% of people do not have a bank account. Bitcoin allows for fast, cheap payments across borders and requires no banking.

Every Salvadoran was given $30 in bitcoin (the US dollar is the other official currency of the country) and can now shop or pay their taxes with it. Companies must accept it by law, but are allowed to instantly swap all bitcoins for dollars upon receipt. A Panamanian congressman has now proposed legislation that would see the country follow in El Salvador’s footsteps.

Will it work?

There will be obstacles, as bitcoin is not simple to use. While many people in El Salvador have post their successful bitcoin purchases on social media, others marched in the streets to protest.

And the markets are bewildered. NS Financial Times reported that long-term Salvadoran bond yields rose from 8.5% in June prior to the bitcoin announcement to 11%, meaning confidence in the state’s finances has dropped,

Bitcoin itself is volatile (the coin’s value has dropped to as low as £21,700 and as high as £46,500 this year), which is not a desirable asset for legal tender . A company that accepts bitcoin payments may find that the value of that coin has dropped when it’s time to buy new shares.

Will many other countries follow suit?

In short, no. It is highly unlikely that any major economy favors a cryptocurrency like bitcoin, which cannot be controlled by a central bank and was created by a secret cryptographer.

But we could see central banks around the world launching their own digital currencies, combining the benefits of crypto and traditional money. Financial consulting firm PwC released a report earlier this year on the so-called Central Bank Digital Currency (CBDC). The report claims that 60 governments are currently working on one and that 88% are based on blockchain, the technology behind bitcoin, although not all CBDCs will be cryptocurrencies.

Has any country started using CBDC yet?

The Bahamas was one of the first countries to issue a CBDC, launching a cryptocurrency version of the Bahamian dollar last year in an effort to avoid transferring physical cash across its 700 small islands. Cambodia, too, launched a CBDC version of its own coin called Bakong in 2020.

China has been testing its CNY cryptocurrency for some time and plans to do a large-scale test during next year’s Winter Olympics. The United States has two programs running to investigate the digital dollar, and the Bank of England is talking to banks, retailers and members of the public to decide on its digital currency. what they themselves look like.

How does CDBC work?

Unlike a decentralized cryptocurrency, which is not controlled by a single institution, a central bank will administer a CBDC. But it may retain some of the perceived benefits of cryptocurrencies, such as simple transfers of large sums, the ability to eliminate physical cash, and an audit trail to crack down on corruption and fraud. tax. But while cryptocurrencies like bitcoin have a hardcoded limit on how many coins will exist, a CBDC can be created out of thin air by central banks with quantitative easing like with traditional currencies — something bitcoin advocates see as a major drawback.