On Tuesday, El Salvador became the first country to adopt bitcoin as a national currency, kicking off a bold monetary experiment that could jeopardize the country’s fragile economy.
Late Monday, President Nayib Bukele announced that his government had purchased another 200 bitcoins in preparation for El Salvador’s formal adoption of the cryptocurrency. El Salvador now owns 400 bitcoins, worth nearly $21 million at today’s exchange rates.
Starting on Tuesday, Bitcoin will be accepted as legal tender alongside the US dollar in El Salvador. “As the deadline approaches,” Bukele tweeted, “the country’s brokers will buy much more.”
In June, Bukele, a right-wing populist who came to power in 2019, announced his intention to use bitcoin. All “economic agents” must accept bitcoin as a form of payment, according to the law designating bitcoin as legal tender. Tax payments can also be made in bitcoin, according to the document.
Salvadorans will be able to download the “Chivo Wallet,” a government-created app that will give people $30 worth of bitcoin to encourage them to use it.
“The process of #Bitcoin in El Salvador has a learning curve. Every step toward the future is like this, and we will not achieve everything in a day, nor in a month,” Bukele tweeted. “But we must break the paradigms of the past.”
Some citizens are enthusiastic about technology, while others are skeptical. A baker, José Abraham Cerón, told CNN that dealing in bitcoin is not difficult. The owner of a nearby tortilla shop, Blanca Estela Ponce, however, prefers cash.
“[Bitcoin is] something new and we don’t have enough information about it,” Ponce told CNN.
El Salvador has partnered with Strike, a digital finance company, to build the necessary infrastructure.
Because cryptocurrencies are stored in digital wallets rather than traditional bank accounts, people in poorer communities with limited access to banks may be able to use bitcoin to gain greater control over their finances.
Social organizations, on the other hand, have petitioned the Salvadoran government to repeal the law, citing concerns about the cryptocurrency’s extreme volatility.
Following a dramatic crash earlier this year, Bitcoin has regained some lost ground, but it is still well below its April high of nearly $65,000.
According to Coinbase, the price was $51,360 on Tuesday, down 0.7 percent in the previous 24 hours. The International Monetary Fund, which gave El Salvador an emergency loan last year and is now negotiating another round of loans, has expressed reservations about using bitcoin as legal tender, citing a slew of economic, financial, and legal concerns.
“How do we know what we collect in taxes when bitcoin goes up and bitcoin goes down? How do we plan for expenditures? Remember in April, bitcoin crossed $65,000 and then it dropped almost half of it. That is a problem that the ministry of finance is going to be wrestling with. And it is not an easy one,” Kristalina Georgieva, managing director of the IMF, said recently.
El Salvador’s debt rating was downgraded by Moody’s Investors Service in late July, citing “a deterioration in the quality of policymaking,” including the government’s decision to accept bitcoin as legal tender.
According to Moody’s, the country is still vulnerable to financing shocks, which could jeopardize the government’s ability to repay creditors as early as January 2023.
The government of El Salvador is betting that making bitcoin legal tender will attract new investment. Commissions paid for sending remittances from abroad are also expected to be reduced, according to the authorities.