El Salvador’s President NayibBukele has said that he would be making the Bitcoin cryptocurrency legal tender in the Central American country. If that happens, El Salvador would become the first country in the world to formally adopt the virtual currency.
Why does El Salvador want to adopt Bitcoin as an official tender?
- It depends heavily on remittances sent by Salvadorians from abroad.
- Around a quarter of the country’s citizens live in the US, and in 2020 they sent home more than $6 billion in remittances i.e. more than 20% of the GDP.
- A big chunk of those 6 billion dollars is lost to intermediaries. By using Bitcoin, the amount received by more than a million low income families will increase in the equivalent of billions of dollars every year.
- Also, Bitcoin will help increase financial inclusion in El Salvador, where 70% of the population does not have a bank account and relies on the informal economy.
- El Salvador has not had its own monetary policy since 2001, when a right-wing government made the US dollar the official currency.
- Along with Ecuador and Panama, El Salvador is currently among three nations in Latin America to have a ‘dollarized economy.
Adopting virtual currencies globally
- The use of cryptocurrencies is gathering pace where there are economic uncertainties, such as in Cuba, Venezuela and Mexico.
- In Cuba, the appeal of cryptocurrencies has proliferated ever since its Communist regime allowed mobile internet in 2018, as many have used them for circumventing US sanctions and a decades-long trade embargo.
- In Mexico, where also remittances from the US form a huge source of income, the crypto market has boomed.
- In Venezuela, which is undergoing an economic and humanitarian crisis, many are adopting crypto money as spiralling hyperinflation has harmed the bolivar, the official currency.
Attitude of governments towards cryptocurrencies
- Governments around the world are now looking to launch their own virtual tokens, called central bank digital currencies (CBDCs).
- US has taken a decisive step towards issuing its own CBDC.
- In India too, the government has floated The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
- It will prohibit all private cryptocurrencies and lay down the regulatory framework for the launch of an “official digital currency”.
- A central bank digital currency (CBDC) utilizes technology to represent a country's official currency in digital form.
- Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.