This move received widespread praise from the cryptocurrency community but faced significant opposition from the traditional financial sector. Critics argue that adopting Bitcoin as legal tender could introduce instability and unnecessary risks to the country’s economy.
President Bukele has argued that Bitcoin adoption will help bring more Salvadorans into the formal economy, particularly since more than 70% of the population is unbanked. This was a key topic at the 17th May Bitcoin conference. He has also stated that cryptocurrencies could free developing nations from the constraints of traditional financial systems. El Salvador considers its Bitcoin experiment successful and hopes to inspire other countries to follow suit.
Other than El Salvador, the Central African Republic is the only nation that has adopted Bitcoin as legal tender. Panama is also working on legislation to promote Bitcoin use, though it will not treat the cryptocurrency as legal tender.
Is Using Bitcoin as Legal Tender Too Risky?
As El Salvador pushes other developing nations to adopt Bitcoin as legal tender, it’s crucial to examine the risks associated with such a decision. The Salvadoran population, in general, protested Bitcoin’s adoption, arguing that it primarily benefits investors, rather than the common people. With around half the population lacking internet access, it remains unclear how they are expected to use Bitcoin for transactions.
One of the most significant risks of using Bitcoin as legal tender is its inherent volatility and the fact that Bitcoin is not backed by any assets. The frequent price swings of Bitcoin pose a threat to the economy and citizens’ savings. Financial analysts worry about the potential for such instability to ripple across entire economies.
International financial institutions, such as the International Monetary Fund (IMF) and The World Bank, have also expressed concerns over this policy. They warn that adopting Bitcoin as legal tender could expose the country to illicit activities, such as money laundering.
Some cryptocurrency supporters have also pointed out the irony of a government embracing a currency designed to reduce government control.
To encourage adoption, El Salvador introduced its own digital wallet called Chivo. Those who downloaded the wallet were offered a $30 Bitcoin bonus. The country has also established 200 ATMs and 50 consulting centers where residents can withdraw funds.
Although the country has faced losses due to the recent downturn in crypto prices, El Salvador’s Bitcoin experiment has generally been deemed a success.
