Using Bitcoin to buy clothes, snacks, even the daily newspaper instead of US dollars is now an option to the people in El Salvador. The country becomes the first in the world to adopt highly volatile decentralized cryptos as its national currency. El Salvador's president announced the plan in June, making a surprise appearance via video link at a Bitcoin conference being held in Miami, USA.
It's a big test for bitcoin in the real world and Salvadorans. To get them started, the government is giving $30 to people who sign up for an e-wallet called Chivo, which allows for the automatic conversion of dollars to Bitcoin and vice versa. President Nayib Bukele used his Twitter account to press online stores to stock this digital wallet app and Huawei later began making it available. F200
But when the app proved unable to cope with user registrations, the government unplugged it in order to connect to more servers and increase capacity. Still, as the app began appearing on more platforms, Bukele was seen retweeting videos on Social media with people making payments using bitcoin at retailers in El Salvador including McDonald's, Pizza Hut, and Starbucks.
Bitcoin and its adaptation in the real world have been a matter of debate for years. Its advocates boast about the decentralized nature of bitcoin and its return on investment. Critics however are always concerned about the highly volatile nature of bitcoin and they doubt its use in the real world.
It doesn’t matter which side you find yourself on, but you will agree that cryptos have gone from “a scam” to the “hottest topic” in just a few years. It has attracted billions of dollars as investment from people all around the world. In an unprecedented move, the country of El Salvador has declared Bitcoin as legal tender.
This means that people would be able to use bitcoin in their day-to-day lives along with the US dollar.
What is the government’s objective behind this decision?
President Bukele has said that adopting Bitcoin will, among other things, attract foreign investment and foster cheaper financial services. “Like all innovations, El Salvador's bitcoin process has a learning curve. Every road to the future is like this and not everything will be achieved in a day, or in a month” Nayib Bukele wrote on Twitter.
Another major reason the country of $26 billion economy did so is to save up fees for remittances. In the year 2020 alone, El Salvador received $6 bn in remittance mostly from the United States. The government plans to save 400 million paid as commission for the remittance. Considering the fact that the GDP of El Salvador was just $24.6 bn last year, it is a big number.
Problem with this decision
Internet is flooded with congratulatory messages and tweets from all around the world. People are calling this a giant leap by mankind towards the decentralized payment system. Most of the people in this crowd seem to be investors and exchange platforms. Meanwhile, 80% of Salvadorians have little or no confidence in Bitcoin. A lot of people think that El Salvador is not really prepared for this type of adoption.
1. According to Tradingeconomics.com’s report from 2019, 66.18% don't have smartphones, and if they do, then they don't have data plans. A lot of the people who own a smartphone and understand Bitcoin too seem to be unhappy with this decision. Few of them are scared that the number of scams/fraud can spike due to anonymity and authority issues in this payment system.
2. There is no practical way to track the transfer of crypto like fiat currency. This is the reason many criminals are using crypto for the transaction. You must have heard kidnappers asking for Bitcoin as ransom in the news. There is also no authority backing this payment made, unlike fiat money.
3. If you get scammed or lose money, you can always go to your bank and seek help. But no one can help you in the case of cryptos.
5. There are cases of people who have lost millions just because they forgot the password of their wallets and are now helpless.
6. People also fear the volatility of cryptocurrency. Cryptocurrency is highly volatile in its nature. Just this year, it rose over $64,000 in April and fell almost as low as $30,000 in May.
Bitcoin plunged as much as 17% to its lowest level in a month with the El Salvador’s crypto rollout faltering.
The largest cryptocurrency fell as low as $43,050 in New York, tumbling more than 10% in the course of an hour after it had broken. The Bloomberg Galaxy Crypto Index, which tracks some of the largest cryptos, lost as much as 19%, while other smaller digital assets also sold off. While the internet was applauding this move by El Salvador, here’s what a critic Peter Schiff, American stockbroker, financial commentator, and radio personality wrote against this move.
Protest against use of Bitcoin
More than 200 new cash machines have been installed across the country to enable dollars to be converted into Bitcoin. As the currency's price wobbled, the government has purchased an additional 150 bitcoins, worth around $7 million. Against this, more than a thousand people held a protest on Tuesday against the adoption of bitcoin, by burning tires, and setting off fireworks in front of the Supreme Court.
The recent protests in San Salvador (the capital) have demonstrated a lack of confidence among citizens who feel the measure is a distraction from the government's controversial rule.
Many governments across the world, like China, are attempting to restrict the adoption of cryptocurrency with increased regulations. But, former El Salvadorian resident and now US-based Bitcoin enthusiast Gerson Martinez thinks El Salvador won't be the last country to adopt Bitcoin. “It's hard to describe the hope and joy it makes me feel that our country is the first domino to fall in this inevitable transition. What a time to be a Salvadoran,” he said.
This change will lead to businesses accepting payment in bitcoin alongside the U.S. dollar, which has been El Salvador's official currency since 2001 and will remain legal tender. Yet, it remains unclear whether businesses will be penalized if they do not accept bitcoin.
Analysts fear the adoption of bitcoin, whose transaction records are distributed across the internet, beyond the reach of national jurisdiction or authority, could encourage money laundering. After the bitcoin law was approved, certain agencies downgraded El Salvador's creditworthiness. Meanwhile, its dollar-denominated bonds have also come under pressure.
The huge risk inherent in a highly volatile anonymous digital currency is best left to those who understand the game well, or who don’t really care because they can mitigate the risk or absorb any losses. El Salvador has the right to advance toward the first world, as the president believes but still, it cannot justify the usefulness of this bitcoin rollout for mainstream adoption.