Proponents of Bitcoin, the world's first cryptocurrency, have relentlessly trumpeted claims that it has the power to overhaul the current financial systems in place, and potentially, our understanding of money itself.
But despite rising rates of crypto adoption, lingering questions over its capacity to serve as a means of legal tender for the more mundane acts of buying and selling goods and services have spooked most governments from conducting a more nuanced appreciation of its potential even as an asset class, sometimes to the point of complete inaction.
That may be about to change on the back of El Salvador's decision to recognise Bitcoin as legal tender. According to the Bill that just passed in the country's parliamentary halls, Salvadorians can now even pay their taxes in Bitcoin with “economic agents” obligated to accept the cryptocurrency as payment.
In passing the Bill, the Latin American nation has become the first in the world to take a leap that even some of the largest technophile nations like Singapore and the United States have, so far, refrained from.
There remains a lot of uncertainty around how the financial system will operate in El Salvador now, particularly because the country doesn't have a currency of its own, and instead uses the US dollar as its circulating currency. The Bill passed in Congress warrants the creation of a fund that will be used to guarantee the convertibility of Bitcoin into US dollars.
For such dollarised economies, of which there are a fair few, creating a parallel currency for legal tender may be viewed as a step toward financial freedom since they will no longer be entirely subject to the whims of monetary and fiscal policymakers in the US.
Given that El Salvador's fiscal deficit has swelled to over 10 per cent of its GDP due to the impact of the COVID-19 pandemic, it does appear that the move to accept Bitcoin as legal tender hinges on the prospect of the Latin American country attracting increased investment in the form of the cryptocurrency. If indeed, this materialises, it may prompt other dollarised economies to follow El Salvador's example as well.
The global financial community will be keeping a close eye on El Salvador in the coming months. The high price volatility of the cryptocurrency is the ammunition that Bitcoin's detractors use to castigate it but proponents argue that this is, ultimately, a problem that will solve itself as the supply of Bitcoins increases (via continued Bitcoin mining) and the cryptocurrency matures through increased adoption.
The second bone of contention detractors have with Bitcoin stems from the store of value principle. Can it be compared to other asset classes like gold, the value of which is not, directly tied to global economic cycles? El Salvador seems to think so and if its gamble does succeed, it could bolster confidence within other governments to classify Bitcoin as an alternative asset class, not unlike the precious yellow metal.
Finally, the fact that the prices of cryptocurrencies only witnessed marginal gains on the back of El Salvador's announcement suggests that the broader crypto investor community seems to have adopted a 'wait and watch' approach. Risks of Bitcoin exchanges being hacked, El Salvador turning into a haven for money laundering or further boom-and-bust price cycles of Bitcoin are certainly real and present. But if the country's vault into the unknown bears fruit, it may give cryptocurrency adoption a powerful boost.
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