While cryptocurrency usage and interest may have accelerated like never before in the last 18 months, there have still been a lot of doubts around whether crypto can ever become reliable ‘money’ or ‘currency’, such that it is used in place of fiat currency.
The volatility of most cryptocurrencies makes it almost impossible to use them as a store of value, as the value fluctuates too frequently and by too much.
This has been the primary concern of organizations such as the IMF around the rise of crypto in recent times, and many have warned that this is a bubble that could burst at any time. In fact, Bitcoin is down by more than 50% since its highs in May, as the crypto market has dropped significantly in the last few weeks on the back of several noteworthy events in the industry.
Nevertheless, the demand for crypto remains strong, especially in various industries and businesses online which have begun to adopt crypto as a means of payment.
Others have even gone to the extent of integrating crypto into their operations. Just look at the online gambling sector as an example – the Bitcoin casino Winz.io is just one of many that now offer users the option to place bets online via crypto tokens such as Bitcoin. This has understandably proved to be quite popular, and is just one example of how crypto is still having a big impact in the online economy, as well as the larger economic space. One of the most newsworthy events in this regard has just taken place, with El Salvador soon to become the first country in the world to allow Bitcoin to be used as legal tender.
President Nayib Bukele announced this plan in a video broadcast to the Bitcoin 2021 conference being held in Miami. The country will partner with the digital wallet company Strike to build the financial infrastructure needed to support this move, and also to help improve existing systems.
Thus, Bitcoin will be accepted as legal tender in El Salvador along with the US dollar, with President Bukele stating that he will send a bill to Congress soon to start this process. Strike also launched operations in the country as recently as March, and it soon became the most downloaded app in the country.
According to Jack Mallers, the founder of Strike, this will be a great way for a developing economy like El Salvador to protect itself from the potential shocks of sharp fiat currency inflation. El Salvador is largely a cash economy, with over 70% of the population not having access to bank accounts or credit cards. More than 20% of the country’s GDP is made up of remittances from migrants abroad, and with existing services charging as high as 10% in fees for these transfers, the use of Bitcoin as legal tender can offer a cheap and quick alternative, while also being far more convenient.
However, there are some concerns that this could have a negative impact on the economy. Crypto transactions could be difficult to track, which will make it easier to avoid taxation and thereby increase the difficulties in tax collection for the government, while El Salvador’s government debt could also become more expensive, with investors demanding a premium to invest in the country.
President Bukele has largely been extremely popular since his party New Ideas swept the recent elections, so it will be very interesting to see how this latest innovation works, and whether it can help transform the economy and further entrench the president’s popularity.