The World Bank has recently El Salvador’s request of helping the nation introduce the cryptocurrency, Bitcoin, as legal tender within the nation.
El Salvador mainly uses the dollar due to its stability and setting Bitcoin as legal tender within the nation will somewhat make it the currency of the nation as it will be completely legal for firms to accept the currency for payment.
In fact, this acceptance of Bitcoin as payment is even encouraged as the new law regarding the currency legislates that businesses must accept Bitcoin as legal tender unless they are unable to.
El Salvador’s decision comes at a time where Bitcoin is seeing increasing popularity as during its course the cryptocurrency has seen a significant gain in value.
This is due to the increasing demand for cryptocurrency especially during the lockdown period as average individuals sought hobbies such as day trading during the COVID-19 pandemic using applications such as Trading212 and Robinhood to make their fortune on the stock market.
This influx of day traders as well as young traders on online forums such as Wall Street Bets, a place which you really shouldn’t go on for financial advice, has led to the increasing popularity of Bitcoin as the cryptocurrency has particularly won over the hearts of traders due to its past performance.
And this past performance is yielding a self-fulfilling prophecy as traders buy Bitcoin in the hopes it will increase in value and this purchasing increases demand which in turn raises the price especially due to the fact that the supply of Bitcoin is completely inelastic as the supply of money is fixed.
This is different to traditional fiat currency such as the pound, a currency that can have variations in its supply due to expansionary monetary policy through the use of quantitative easing.
But why has El Salvador decided to attempt to adopt Bitcoin as a currency?
The answer is unclear, it could just be more of a publicity stunt to drive up demand for the currency, which will be incredibly beneficial for the government of El Salvador if they have a significant share of the coins in circulation.
But are there any economic benefits of such a decision?
The World Bank declared that the reason for its decision of not supporting El Salvador’s decision is due to the organisation seeing “macroeconomic, financial and legal issues" with El Salvador's adoption of Bitcoin, the BBC reports.
These issues can range from the fact that other nations may not accept Bitcoin as payment for international payments and trade, a somewhat significant factor as El Salvador’s economy 20% of the country's gross domestic product. (GDP)
This complicates things as if individuals from El Salvador cannot exchange their current currency, the U.S dollar, for Bitcoin, then their remittances may become somewhat worthless especially if businesses and workers within the nation decide to use Bitcoin as their preferred method of transaction.
However, this may not be the case as the likelihood is that Bitcoin will be used alongside the U.S dollar for legal tender.
Further complications may arise if the government of El Salvador attempting to use Bitcoin for paying back fiscal debt or other forms of payments that are more international as nations such as China, which have recently lost their support for Bitcoin, may not accept the currency as payment.
Furthermore, due to the implementation of Bitcoin as legal tender, El Salvador will have even less control when it comes to monetary policy, which is an area that the nation already has little to no control over as it uses the U.S dollar, whose money supply is managed by the American Federal Reserve.
The future for Bitcoin is quite uncertain, especially due to the fact that countries such as China and companies like Tesla are withdrawing support.
However, if Bitcoin’s implementation as legal tender is successful combined with efforts of making the mining of the currency “greener” may lead to a bright future for Bitcoin.
Written by Hubert Kucharski