Why does El Salvador want to adopt Bitcoin as an official tender?

El Salvador, with a population of around 64 lakh and an area slightly bigger than Meghalaya, depends heavily on remittances sent by Salvadorians from abroad. Around a quarter of the country’s citizens live in the US, and in 2020 they sent home more than $6 billion in remittances despite the pandemic– making up more than 20% of the GDP.

 

Addressing the issue, Bukele said that currently “a big chunk of those 6 billion dollars is lost to intermediaries. By using Bitcoin, the amount received by more than a million low income families will increase in the equivalent of billions of dollars every year.”

 

Bukele also said that Bitcoin will help increase financial inclusion in El Salvador, where 70% of the population does not have a bank account and relies on the informal economy.

 

“Financial inclusion is not only a moral imperative, but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions,” he said. “We hope that this decision will be just the beginning in providing a space where some of the leading innovators can reimagine the future of finance.

When Bitcoin will be used like dollars?

It's too soon to tell.

Bitcoin's value has fluctuated wildly through its 12-year life, with regular daily double digit price moves rendering it impractical for commerce. It remains little used for buying goods and services across the world, despite a growing number of major companies accepting it as payment.

 

El Salvador said the bitcoin-dollar exchange rate will be set by markets. Yet no detail has been given on how this will work in practice and whether and how vendors and businesses will reflect pricing in real-time or maybe through other mechanisms.

The government is guaranteeing convertibility to dollars at the time of transaction through a $150 million trust created at the country's development bank.

 

In theory, bitcoin offers a quick and cheap way to send money across borders without relying on traditional financial firms such as banks and remittance companies.

 

Backers say it could catch on in emerging markets particularly, where people lack access to traditional financial services and have to pay costly fees for sending and receiving money.

The government will protect citizens from the volatility of Bitcoin prices by guaranteeing quick convertibility to dollars. If a shopkeeper does not want to hold the Bitcoin which they now have to accept from customers, the government will purchase it through a $150million trust created at the country’s development bank. As for the carbon footprint, Mr. Bukele says he has asked the Stateowned geothermal electric company, LaGeo, to connect renewable energy from the country’s volcanoes to bitcoin mining facilities.

Where around the world virtual currencies are used?

In many parts of the world that are plagued by economic uncertainties, the use of cryptocurrencies is fast gathering pace, such as in Cuba, Venezuela and Mexico, where many are preferring virtual tokens that are decentralised and unregulated.

 

In Cuba, the appeal of cryptocurrencies has proliferated ever since its Communist regime allowed mobile internet in 2018, as many have used them for circumventing US sanctions and a decades-long trade embargo. Virtual money is being used for making payment for utilities, cross-border transactions, as well as for remittances from abroad, as per The Washington Post.

 

In Mexico, where also remittances from the US form a huge source of income, the crypto market has boomed. Between September 2019 and May 2020, the country’s Bitso crypto exchange grew by 342%, the WaPo report said, partly from processing remittance transactions.

 

In Venezuela, which is undergoing an economic and humanitarian crisis, many are adopting crypto money as spiralling hyperinflation has harmed the bolivar, the official currency.

Who is Nayib Bukele?

Bukele, who is described as an anti-establishment populist, is El Salvador’s first president in 30 years to win the top office without the support of one of the country’s major parties. He won the presidential election in 2019 on an agenda of fighting corruption and gang violence, and currently enjoys an approval rating of over 85%.

 

Before becoming president, the media-savvy leader worked at his father’s marketing company before getting elected as the mayor of San Salvador, the nation’s capital, and of a suburb.

Critics, however, have blamed Bukele for moving El Salvador in an increasingly authoritarian direction. This year, Bukele removed five judges of the Supreme Court and the attorney general– officials who had been critical of his drastic measures during the pandemic. The move was denounced as a power grab.

 

Bukele got along well with former US President Donald Trump, but has had a more tense relationship with the current Biden administration, which last month asked him to reverse his move to fire the top judges and the attorney general. Bukele refused.

The growing allure of cryptocurrencies– which allow instantaneous transactions and need digital wallets instead of bank accounts– have grabbed the attention of governments around the world who are now looking to launch their own virtual tokens, called central bank digital currencies (CBDCs).

 

CBDCs are being touted as a means for extending financial services to those who have remained underserved by traditional banks, while mitigating the risks of unregulated private tokens such as Bitcoin.

How does Bitcoin work?

Bitcoin is the first and biggest of decentralized cryptocurrencies, which are online payment systems that are increasingly becoming mainstream. Etherium, Tether, and Binance Coin are some of the many others that have emerged after Bitcoin. Cryptocurrencies are built on the back of blockchain technology, a system of distributed, cryptographically secured account keeping. In this system, the users keep a tab on every digital ‘coin’ and transaction rather than a banking system with a governing body at its centre.

A virtual currency is a digital representation of value that can be digitally traded and functions as (a) a medium of exchange, and/ or (b) a unit of account, and/or (c) a store of value, but, unlike fiat currency like the rupee, it is not legal tender and does not have the backing of a government. A cryptocurrency is a subset of virtual currencies, and is decentralised, and protected by cryptography.