El Salvador Bitcoin Push: What Does That Mean For Cryptocurrencies?

Employees of the Bitcoin Support Office will learn how to trade with a woman at El Zonte Beach in Chiltiupan, El Salvador, June 8, 2021. REUTERS / Jose Cabezas

June 11, 2021

Tom Wilson and Karin Strohecker

London (Reuters) – El Salvador is the first country in the world to adopt Bitcoin as fiat currency. President Nayib Bukele has advertised that it may help Salvadorans living abroad send remittances domestically.

For emerging markets such as Bitcoin as the mainstream currency and El Salvador, this move means:

What does the law say?

El Salvador’s law means that Bitcoin has the same position as the dollar, which became the official currency 20 years ago.

Making Bitcoin a “fiat currency” means that shops and businesses must accept Bitcoin for their goods and services and can choose to express their prices in currency.

Taxes can also be paid using Bitcoin, but that use is optional.

So is Bitcoin used like a dollar?

It’s too early to say.

The value of Bitcoin fluctuates significantly throughout its 12-year lifespan and is impractical for commercial transactions due to regular double-digit price fluctuations every day.

Despite the increasing number of large companies accepting payments, they are rarely used to purchase goods and services around the world.

El Salvador said the exchange rate between Bitcoin and the dollar is set by the market. However, it does not provide details on how this actually works, whether vendors and businesses reflect pricing in real time, or perhaps through other mechanisms, and how.

The government guarantees convertibility to dollars at the time of transaction through a $ 150 million trust created by the national development bank.

Is Bitcoin really the current currency?

Bitcoin was designed as a currency, but many investors see it as a gold-like asset rather than a substitute for the dollar, euro, or yen. Financial regulators and law enforcement agencies around the world are discussing the status of cryptocurrencies and how they should be regulated.

With the introduction of Bitcoin in El Salvador, the jury is still considering whether Bitcoin will become a more trading mechanism or will take over the function of the currency on its own.

Is it the beginning of a wider trend?

In theory, Bitcoin provides a fast and cheap way to transfer money across borders without resorting to traditional financial companies such as banks and money transfer companies.

Proponents say it can be particularly prevalent in emerging markets where people lack access to traditional financial services and have to pay high fees for sending and receiving money.

However, the conversion of Bitcoin to local currency in such economies tends to rely on informal brokers, requires know-how, and is at risk of fraud and price fluctuations.

Analysts say it’s too early to determine if the El Salvador move will start a broader trend in Bitcoin adoption.

How does it work in emerging markets?

The El Salvador experiment provides analysts with the first opportunity to measure the impact of cryptocurrencies on the economy.

There are also warnings that increased use of cryptocurrencies will reduce the effectiveness of monetary policy.

El Salvador is already using greenback as fiat currency, but in other emerging economies on the verge of dollarization, the use of cryptocurrencies amplifies this and the central bank acts as the lender of last resort. It may weaken your ability.

Inflation is also focused.

Bitcoin, like many other cryptocurrencies, has a limited supply designed to mitigate the effects of inflation. However, experts predict that an increase in cryptocurrency business cases could spur the creation of new ones. This means that the overall supply is unrestricted and potentially proof of inflation.

(Report by Tom Wilson and Karin Strohecker, edited by Chizu Nomiyama)

El Salvador Bitcoin Push: What Does That Mean For Cryptocurrencies?

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