El Salvador is the first country to adopt Bitcoin as its national currency, placing the cryptocurrency alongside the dollar. Although scheduled after the announcement made at the beginning of the summer, the decision has gone around the world and opened a reflection on the advantages and risks of relying on a virtual currency, subject by nature to constant volatility that varies its actual value. In the case of the Central American country, the choice made by President Nayib Bukele aims to boost the economy, although the process will be long and fraught with difficulties.
Every citizen of El Salvador can download Chivo Wallet, the government-developed app that allows them to use the equivalent of $30 in bitcoin, onto their smartphones to encourage people to try the novelty and increase purchases made with the cryptocurrency. To facilitate transactions, the government is also installing 200 Atm points where people can insert dollars and receive bitcoin into their virtual wallets, as part of a program that began with the government’s purchase of 400 bitcoin and the creation of a $150 million guarantee fund at the state bank.
Citizens do not know about cryptocurrencies
It did not get off to the best of starts, with several technical problems marking the launch of the initiative, with president Bukele himself forced to admit on Twitter that “we set the challenge too high and we made mistakes”, adding that “the government is working to improve the user experience” and reminding us that “the use of bitcoin is optional”. At the same time, it should be noted that according to the rules, traders and merchants must accept bitcoin and display the prices of products in digital currency as well as in dollars. The exception to the system, necessary in order not to bog down the system and to insure citizens, concerns salaries and pensions, which will always be paid in dollars.
The launch that should revive the country’s economy and provide a springboard for the large-scale dissemination of cryptocurrencies as legal tender has not been well prepared in El Salvador. For a population largely uneducated in financial exchange, so much so that it does not consider accessing and using the main banking services betting on bitcoin without the necessary prior information could prove to be a boomerang. Less than 5% of more than 1,200 participants in a survey conducted by the country’s Instituto Universitario de Opinion Publica (Iudop) showed knowledge of bitcoin and cryptocurrencies, while 20% had no idea what it was.
“We don’t know the currency, we don’t know if it will bring profits or losses, we don’t know anything about it,” a businessman in the country told Reuters, while a Salvadoran businesswoman told the BBC of “too many illiterate people don’t own a mobile phone”, and who therefore “will not use the virtual currency”. It is not surprising, therefore, that citizens in the capital have repeatedly protested against the government’s decision, seen by many as a distraction from the many economic problems facing the country. So much so that according to other data compiled by Iudop, 7 out of 10 citizens would like the bitcoin law to be repealed.
Volatility is a risk without an answer
The population’s concern is the same as that of the world’s major economic players, because cryptocurrencies are characterized by volatility, with constant fluctuations that change their actual value. A risk for the individual, a great risk for a government that has to plan investments, revenues and expenses for all kinds of projects based on a currency with an uncertain and unpredictable value. Also subject to speculation and computer fraud. A practical example of this occurred a few days after bitcoins became common currency in El Salvador: as the quotations fell, the value of the 400 bitcoins previously bought by the local government dropped from $21 million to $18 million.
Several experts in the field are convinced that bitcoin will bring medium- and long-term benefits to El Salvador’s economy, for decades one of the poorest in Latin America. In the present, however, the country is receiving negative reviews from the International Monetary Fund, with which it is negotiating a loan of USD 1 billion, which considers the adoption of cryptocurrencies a ‘risk to macro-financial stability, consumers and the environment’. In addition to the dangers of money laundering and uncontrollable financing (potentially even tax evasion or support for terrorist groups), bitcoin and other virtual currencies require huge amounts of electricity to power the computers that carry out transactions. To get an idea of the energy consumption related to bitcoin, a study by the University of Cambridge indicated a higher amount in 2019 than in Egypt.
The mix between traditional currencies and cryptocurrencies
Despite obstacles and limitations, cryptocurrencies continue to attract interest on a global scale. In the past few days, Ukraine has approved a regulation that aims to make digital currencies legal, with the aim of opening up their use to companies and private individuals from 2022, while a similar bill will soon be discussed in Panama. Rather than a total reversal of the field, however, it is likely that in the coming years we will see a transition aimed at making traditional currencies coexist with virtual ones. A vision that for many countries involves the creation of a cryptocurrency launched by their central banks.
According to estimates by some financial consultancies, there are more than 80 countries working on a Central Bank Digital Currencies (CBDC), including the United States, the United Kingdom and China, which, after being applied in more than 1.3 million scenarios for payments related to restaurant, transport, shopping and government services, is expected to carry out a broader test of e-CNY, the digital version of the yuan, during the Winter Olympics scheduled to take place in Beijing from 4 to 20 February 2022.
Before them came the Bahamas, with a cryptocurrency designed to limit the movement of physical money between its 700 islands, while in Cambodia one can use the national virtual currency, Bakong, to transfer funds from the national bank to Maybank, one of Malaysia’s major banks. In both cases, and in all other CBDCs to come, the conceptual differences with bitcoins are the management of a central bank instead of a network of nodes and the unlimited availability of the currency, compared to the 21 million bitcoins available on the network.