Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Why El Salvador has adopted Bitcoin as legal tender - and what it means for crypto

Why El Salvador has adopted Bitcoin as legal tender - and what it means for crypto

As Latin American nation becomes first country in the world to officially classify Bitcoin as legal currency, Bitcoin holder David Coker, senior lecturer in finance at University of Westminster, explains why

Around the world, bitcoin has a mixed reputation. Owning and using the cryptocurrency is legal in a majority of nations, tolerated in many others, and outlawed by a relatively small number.

El Salvador has just become the first nation to formally adopt the cryptocurrency as legal tender, and a handful of other Latin American leaders have indicated that they would follow suit.

This marks a sharp change in bitcoin’s reputation on the global stage.

Backed by a public ledger called “the blockchain”, holders of bitcoin enjoy a fast and secure way to make payments or receive funds.

And El Salvador clearly has a need to receive funds fast.

Like many other nations, El Salvador’s economy is heavily dependent upon “remittances”, or funds sent home by citizens working abroad. Remittances totalled over 20% of GDP in 2019.

Currently, remittances are delivered by Western Union or other money transfer services which are necessarily centralised and highly regulated.

Sending funds can be complicated, involving an in-person visit to an agent’s office and proof of identity for both the sender and receiver.

Although there are over 500 Western Union offices across El Salvador, those living in rural areas of the nation are particularly inconvenienced.

By contrast, cryptocurrencies like bitcoin allow anyone with a mobile phone to send or receive funds, regardless of location.

A software app known as a “wallet” manages the cryptocurrency as needed. Such wallets are safeguarded on phones and protected by passwords or biometric mechanisms like fingerprints.

Recipients of bitcoin realise their funds by connecting to the internet. Once bitcoin has been received, there are multiple ways to exchange cryptocurrency for cash.

Embracing cryptocurrency as legal tender


Now, El Salvador is taking the relatively easy and rapid transfer of Bitcoin a step further, by accepting it as legal tender.

The cryptocurrency could be spent directly on goods and services, just as the US dollar, or the El Salvador colón (the nation’s existing sovereign currency) are.

Other Latin American politicians have since called for the adoption of bitcoin as legal tender.

In El Salvador, some 70% of citizens are unbanked, meaning they lack access to a basic bank account. We know the unbanked face tremendous challenges in both saving and accumulating wealth.

Those without a bank account are discouraged from saving for at least two reasons.

First, holding cash is risky. A bitcoin wallet, however, protects savings by means of a password or PIN, naturally facilitating the regular saving of small amounts over time.

Second, savers are rewarded by receiving interest on their money. Without this incentive there is little upside to saving.

But there are firms which allow bitcoin holders to receive interest on their cryptocurrency.

So holders of bitcoin can enjoy the services of a bank, without the need to open a bank account.

A desire to help the unbanked is likely mirrored across Latin America, but the ability of bitcoin to rapidly send and receive payments is likely also a draw.

The downsides


Adopting Bitcoin as legal tender is not without its downsides. The cryptocurrency is notoriously volatile; indeed, at the time of this writing it has declined roughly 50% from the April 2021 high of nearly US$65,000.

I hold bitcoin, and view this drop in price as part of the asset class’s risk (hopefully there will be an attendant reward). But I don’t have all of my savings in bitcoin either. If I did, my reaction would be very different.

Also concerning is the prevalence of what are called “whales”, or those controlling wallets with large amounts of bitcoin.

There are roughly 2,000 wallets containing more than 1,000 bitcoins each. It’s not known who controls these wallets, but if several whales decided to sell their bitcoin, there could be tremendous drops in price.

Another issue El Salvadorians and other adopters will face is the inherent deflationary design of bitcoin.

The supply of traditional currencies such as the US dollar can be changed as economic conditions warrant.

America’s central bankers manage the supply of money to stimulate, or slow, the economy as needed. And historically the supply of US dollars has increased to reflect population growth.

By contrast, the total supply of bitcoin is fixed at 21 million coins. At the time of this writing only some 2.2 million bitcoins are left to be mined. Prices, as expressed in bitcoin, will inevitably fall over time.

Also, many analysts suggest the price of bitcoin will rise over time, as both acceptance and demand increase amid decreasing supply.

If even the most conservative of price forecasts for bitcoin are true, those Salvadorians lucky enough to acquire and hold bitcoin early may become wealthy, perhaps fabulously wealthy.

This has already happened with those lucky enough to have purchased bitcoin before 2010, when it cost less than one dollar.

Finally, there are mounting concerns about bitcoin’s environmental impact to consider. While its not clear how this issue will be resolved, it should be evaluated as part of the decision to render bitcoin legal tender.

Considering these risks, one can only wonder why El Salvador hasn’t considered the adoption of what is called a “stablecoin”.

By design, stablecoins such as Tether are fixed at the price of one US dollar.

Stablecoins offer the security and rapid transmission speed of bitcoin, but without the volatility, or lottery-like payoff to early adopters.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Altman Says GPT-5 Already Outpaces Him, Warns AI Could Automate 40% of Work
Russian Research Vessel 'Yantar' Tracked Mapping Europe’s Subsea Cables, Raising Security Alarms
Global Cruise Industry Posts Dramatic Comeback with 34.6 Million Passengers in 2024
U.S. Demands Brussels Scrutinize Digital Rules to Prevent Bias Against American Tech
Private Equity’s Fundraising Surge Triggers Concern of European Market Shake-Out
Tokyo’s Jimbōchō Named World’s Coolest Neighbourhood for 2025
European Officials Fear Trump May Shift Blame for Ukraine War onto EU
The Personality Rights Challenge in India’s AI Era
Italy Considers Freezing Retirement Age at 67 to Avert Scheduled Hike
Italian City to Impose Tax on Visiting Dogs Starting in 2026
Study Finds No Safe Level of Alcohol for Dementia Risk
Trump Says Ukraine Can Fully Restore Borders with NATO Backing
Europe Signals Stronger Support for Taiwan at Major Taipei Defence Show
Germany Weighs Excluding France from Key European Fighter Jet Programme
Cyberattack Disrupts Check-in and Boarding Systems at Major European Airports
Björn Borg Breaks Silence: Memoir Reveals Addiction, Shame and Cancer Battle
When Extremism Hijacks Idealism: How the Baader-Meinhof Gang Emerged and Fell
JWST Data Brings TRAPPIST-1e Closer to Earth-Like Habitability
Trump Orders $100,000 Fee on H-1B Visas and Launches ‘Gold Card’ Immigration Pathway
France’s Looming Budget Crisis and Political Fracture Raise Fears of Becoming Europe’s “Sick Man”
Three Russian MiG-31 Jets Breach Estonian Airspace in ‘Unprecedentedly Brazen’ NATO Incident
European manufacturers against ban on polluting cars: "The industry may collapse"
Turkish car manufacturer Togg Enters German Market with 5-Star Electric Sedan and SUV to Challenge European EV Brands
Christian Brueckner Released from German Prison after Serving Unrelated Sentence
World’s Longest Direct Flight China Eastern to Launch 29-Hour Shanghai–Buenos Aires Direct Flight via Auckland in December
New OpenAI Study Finds Majority of ChatGPT Use Is Personal, Not Professional
The conservative right spreads westward: a huge achievement for 'Alternative for Germany' in local elections
Pope Leo Warns of Societal Crisis Over Mega-CEO Pay, Citing Tesla’s Proposed Trillion-Dollar Package
Poland Green-Lights NATO Deployment in Response to Major Russian Drone Incursion
U.S. and China Agree on Framework to Shift TikTok to American Ownership
Le Pen Tightens the Pressure on Macron as France Edges Toward Political Breakdown
Czech Republic signs €1.34 billion contract for Leopard 2A8 main battle tanks with delivery from 2028
Penske Media Sues Google Over “AI Overviews,” Claiming It Uses Journalism Without Consent and Destroys Traffic
Indian Student Engineers Propose “Project REBIRTH” to Protect Aircraft from Crashes Using AI, Airbags and Smart Materials
One in Three Europeans Now Uses TikTok, According to the Chinese Tech Giant
Could AI Nursing Robots Help Healthcare Staffing Shortages?
NATO Deploys ‘Eastern Sentry’ After Russian Drones Violate Polish Airspace
The New Life of Novak Djokovic
German police raid AfD lawmaker’s offices in inquiry over Chinese payments
Volkswagen launches aggressive strategy to fend off Chinese challenge in Europe’s EV market
France Erupts in Mass ‘Block Everything’ Protests on New PM’s First Day
Poland Shoots Down Russian Drones in Airspace Violation During Ukraine Attack
Apple Introduces Ultra-Thin iPhone Air, Enhanced 17 Series and New Health-Focused Wearables
Macron Appoints Sébastien Lecornu as Prime Minister Amid Budget Crisis and Political Turmoil
Vatican hosts first Catholic LGBTQ pilgrimage
Apple Unveils iPhone 17 Series, iPhone Air, Apple Watch 11 and More at 'Awe Dropping' Event
France joins Eurozone’s ‘periphery’ as turmoil deepens, say investors
France Faces New Political Crisis, again, as Prime Minister Bayrou Pushed Out
Nayib Bukele Points Out Belgian Hypocrisy as Brussels Considers Sending Army into the Streets
France, at an Impasse, Heads Toward Another Government Collapse
×