El Salvador officially launches Bitcoin as Legal Tender

Tuesday, September 7th was a historical day for global finance and the nation of El Salvador. The nation officially adopted the world’s largest cryptocurrency, bitcoin, as legal tender. A controversial economic decision with several analysts warning of the dangers of cryptocurrencies and a 67.9% disapproval rating according to the Central American University, El Salvador.

el salvador flag

The launch coincides with the recent court decision that El Salvadorian president Nayib Bukele could run for a second term – a decision that has been argued as unconstitutional in the international community, with the US Embassy in El Salvador stating that the decision “undermines democracy.”

Why Bitcoin?

El Salvador has several financial issues that plague its citizens. Firstly, around 70% of Salvadorans do not have access to traditional banking services. Secondly, many Salvadorans rely on remittance sent home from Salvadorians who are working overseas. According to the Associated Press, billions of dollars each year are sent back to El Salvador from overseas workers.

President Bukele argued that Bitcoin would significantly reduce the transfer costs that are charged by transfer services such as Western Union. Finally, El Salvador does not have its own currency and instead uses the US dollar. However, that means that US monetary policies won’t cater to the fiscal needs of El Salvador.

Day 1

Technological issues and a large drop in the value of bitcoin marred the historical day. Before the official launch, El Salvador purchased 400 bitcoins – valued at around $20 million USD – in an attempt to drive up the price of the cryptocurrency. However, the cryptocurrency instead dropped from $52,800 to 47,000 by Tuesday afternoon. While some have argued that the sell-off was merely a profit-taking event owing to the 50% bitcoin increase since July, others believe it is a case of “selling the news.”

The first issue to arise was the inability for citizens to download the national digital wallet Chivo. Blaming app download platforms, Apple, Android, and Huawei, president Bukele tweeted that the app had been temporarily disabled to connect additional servers to deal with demand. Also, in a country where many of its citizens are unable to open a bank account, only four bitcoin ATMs are in operation.

Going Forward

Many analysts have warned that this experiment could encourage money laundering as bitcoin transactions are distributed across the internet and out of reach of national jurisdictions. Bitcoin, like other cryptocurrencies, is a highly volatile asset and therefore El Salvador’s economy will be subject to that volatility. Heavy changes in value would significantly impact the local populace as the price of everyday items would change wildly in turn.

After the first day, rating agency Moody’s lowered the creditworthiness of El Salvador and further pressure has been applied to its dollar-denominated bonds. It also appears that El Salvador is going it alone with the World Bank stating on the first day that no help would be offered by the bank owing to the “transparency and environment shortcomings” of the cryptocurrency.

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