Bitcoin becomes legal tender in El Salvador tomorrow (and this worries a lot of people)

El Salvador will become the first country to make bitcoin legal tender on Tuesday, September 7. The government hopes this will boost its financial situation, but the population and many economists are worried about the risks that this transition entails.

The big day is coming. Tomorrow, September 7, bitcoin will become legal tender in El Salvador. Concretely, this means that people wishing to settle a debt with this cryptocurrency will be able to do so: traders and other creditors will not have the right to refuse this means of payment.

Obviously, not all Salvadorans will be required to use bitcoin on a daily basis from tomorrow. The dollar, which is legal tender in the country, will also retain its status as legal tender. Those who prefer the dollar will therefore be free to continue to use it. This large-scale transition is, however, the subject of much controversy.

Reduce costs and attract investment

If the Salvadoran president launched this risky project, this can be explained in part by the economic configuration of El Salvador. About 70% of residents do not have a bank account. The fact that the use of bitcoin only requires a simple digital wallet is therefore a plus. The country’s population also receives a lot of money transfers from abroad. Bitcoin will help make these transfers simpler and less expensive, according to President Nayib Bukele. ” In the short term, this will generate jobs and help better include the thousands of people who are outside the system. “He said when the” bitcoin law “was adopted.

In El Salvador, bitcoin will become legal tender just like the dollar. // Source: Karoline Grabowska / Pexels

Even if the Salvadoran president puts it less prominently, he also hopes to take advantage of the major reconfiguration taking place in bitcoin mining. China, which was home to the majority of global bitcoin mining just a few months ago, has taken drastic action against cryptocurrencies, and ordered electricity providers to stop supplying miners. As a result, some farms have ceased their activities and many entities have undertaken to move them elsewhere, in particular to neighboring Kazakhstan and the United States. Several American states, for example Texas, are very keen to attract these activities to their soil. El Salvador also hopes to take advantage of this shift and highlights its strengths, for example its geothermal capacities thanks to its volcanoes.

El Salvador has gone too fast on the subject

The Salvadoran president nevertheless seems to have gone a little fast. Making a cryptocurrency legal tender is a major project. Already, because it has never been done. Second, because it can have significant repercussions on the country’s economic system. The value of cryptocurrencies is indeed very volatile. Although the price of bitcoin has experienced impressive surges, it has also experienced sharp collapses.

These fluctuations are not necessarily dramatic for solid companies or people with high purchasing power who invest only a limited portion of their money in them. But if companies or individuals start betting a large portion of their funds on bitcoin, these variations can cause them to lose a lot of money. This is all the more risky in a country where 40% of the Salvadoran population already lives below the poverty line.

Mass adoption of cryptocurrencies can also threaten a country’s macroeconomic stability, according to the International Monetary Fund (IMF). ” If goods and services are priced against both real currency and cryptocurrency, individuals and businesses will use a lot of time and resources to determine which currency is most profitable to hold, instead of devote it to production activities. “

If state revenues and expenditures are in different currencies (for example, if Salvadorans decide to pay most of their taxes in bitcoin but the expenditures that the state has to pay are in dollars or vice versa), variations in the exchange rate of currencies could put the state (and therefore the population) in a complex situation, points out the IMF.

A paradise for money laundering?

The body also warns that the adoption of cryptocurrencies in a country will weaken its monetary policy and that prices in the domestic market could become very volatile. ” Even if all prices were set in bitcoin, those of imported goods and services would continue to fluctuate massively. ” Last but not least, cryptocurrencies are sometimes used to launder money. If the country does not take robust measures against these practices, it puts its financial system and fiscal balance at risk, says the IMF. It could also significantly dampen its relations with other countries and their own banks.

As we can see, the issue is particularly delicate. However, the Salvadoran government has chosen to lead this massive transition: the bitcoin law was approved on June 9, barely three months ago. A speed that leaves several Salvadoran economists skeptical. ” The law was passed extremely quickly, without technical study or public debate, deplores Salvadoran economist Ricardo Castañeda in the columns of The Guardian. I don’t think the president understands all the implications of this change ”

Cryptocurrency volatility worries

If the Bank of America had suggested in July that the project could have interesting benefits, other analyzes have since come to qualify this vision. The American Johns Hopkins University, for example, published a study suggesting the savings that bitcoin is supposed to provide – when expatriates send funds to the country – may not be there. The rating agency Moody’s, meanwhile, downgraded the country’s rating, in part because of this bitcoin law.

A not very reassuring context for Salvadorians. A survey carried out in July also suggests that nearly two-thirds of residents do not want to receive a payment in bitcoin. Politicians are often criticized for not reforming quickly enough, but on this subject, President Nayib Bukele would undoubtedly have benefited from being less in a hurry.

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