The government of El Salvador made a big splash in the crypto space this year after it announced that it would make Bitcoin legal tender for citizens and businesses. Despite the warnings, the government moved ahead with the plan and is now working towards full integration.
However, this decision has had significant effects - both internally and externally. Some are excited about the decision, while others believe that it is a bad idea.
Regulators Aren’t Happy With El Salvador
El Salvador’s Bitcoin law came in early June. At the time, President Nayibb Bukele announced that businesses would be mandated to accept Bitcoin as legal tender. The currency will also be a means of payment across El Salvador, meaning that the coin’s adoption is ramping up significantly.
Even besides the law, the government of El Salvador claimed that it would also look into using its volcanoes to mine Bitcoin in an eco-friendly manner. Some sources even claimed that the government was planning to pay some workers in Bitcoin. The only problem is that El Salvador hasn’t been able to move forward with the adoption play by itself. The government needs partners, and it hasn’t quite been able to get many.
After the Bitcoin law came, the government of El Salvador sought technical assistance from the World Bank to make the adoption play a reality. However, the World Bank refused, citing issues with Bitcoin’s transparency and environmental impact. The agency explained that it could help El Salvador with regulatory processes and currency transparency, but it wouldn’t help in actually boosting Bitcoin adoption in the country.
Following the World Bank’s refusal, the United Nations also issued a warning to El Salvador about its Bitcoin adoption. The Economic Commission for Latin America and the Caribbean (ECLAC), a regional commission from the United Nations, warned that Bitcoin adoption would only increase regulatory risks and the potential for money laundering.
According to a report from local news source Diario El Mundo, Alicia Bárcena, ECLAC’s executive secretary, pointed out that there is no study to show the risks or benefits of El Salvador accepting Bitcoin as legal tender. But, the country will still most likely face scrutiny from the Financial Action Task Force (FATF) over the move.
JP Morgan Weighs In
Besides regulators and multinational organizations, finance industry players are also raising eyebrows about the Bitcoin move. JP Morgan analysts reported last month that the move will put a great deal of pressure on Bitcoin and El Salvador itself.
Speaking to Bloomberg, a group of experts from JP Morgan reported that Bitcoin is highly liquid. They explained that most of Bitcoin’s trading volumes have been internalized by major exchanges, and over 90 percent of all BTC doesn’t even change hands in over a year. A country like El Salvador using Bitcoin as a legal tender will put a lot of limitations on Bitcoin’s scalability to serve as an exchange medium.
“Daily payment activity in El Salvador would represent 4% of recent on-chain transaction volume and more than 1% of the total value of tokens which have been transferred between wallets in the past year,” the experts said.
The JP Morgan experts also explained that this move will bring challenges such as impacts on El Salvador’s monetary policy and dollarization. As the demand for Bitcoin conversions experiences an imbalance, offshore dollar liquidity will be unstable, leading to risks for the fiscal balance of payments.
Trouble in the Streets
It definitely doesn’t help that a lot of Salvadorans don’t like this move. Last month, local media outlet El Mundo reported that citizens had taken to the streets to protest the Bitcoin law. Taking the name “Popular Resistance and Rebellion Block,” these people had taken banners saying “No to Bitcoin” and demanding a repeal of El Salvador's Bitcoin law.
In a letter presented, the protesters claimed that President Bukele had passed the Bitcoin law without any consultations with the people. The letter cited Bitcoin’s volatility, comparing investments in the asset to participating in the lottery and betting. The only difference is that while betting is voluntary, Bukele wants to make Bitcoin mandatory.
The group’s primary grievance with Bitcoin seemed to be a perceived imbalance in the asset’s use by the government when compared to the average Salvadoran. As the protesters explained, Bitcoin only serves the use of big businesses in the country - especially those with links to the government.
In part, the letter read:
“Entrepreneurs who put their capital in Bitcoin will not pay taxes on their earnings. In addition, to apply Bitcoin the government will spend millions of dollars of the taxes paid by the people. Bitcoin would facilitate public corruption and the operations of drug, arms, and human traffickers, extortionists, and tax evaders. It would also cause monetary chaos. It would hit people's salaries, pensions and savings, ruin many MSMEs, affect low-income families, and hit the middle class."
There is still a lot of work to be done for Bitcoin to finally become law in El Salvador. However, with so much controversy already, Bukele has his work cut out for him.