In the existing paradigm, we rely on government-issued currency – it often offers security, stability, and standardization of transactions, all essential qualities for a successful legal tender. But, what happens when a government fails? What happens when an economy or a country is in crisis? El Salvador is a perfect, yet unfortunate example of how government-issued currencies can fail us. The country’s situation is also an example of the solutions cryptocurrencies can provide to economies looking for growth in challenging circumstances and the challenges surrounding their adoption.
A Brief Economic Lesson
El Salvador’s economy is at a standstill. Despite numerous efforts by the country, several demanding obstacles in the fabric of El Salvador’s society hold the country captive in a state of perpetual flux. Additionally, sanctions by the US hinder the country’s ability to get back on its feet.
On 8th June 2021, the Salvadorian congress chose Bitcoin as one of its economic saviors by introducing the Bitcoin Law – a law making Bitcoin legal tender in El Salvador. The law comes into effect on September 7, 90 days after its passing. The Salvadorian congress hopes to improve convenience in currency movement and relieve economic burdens on its citizens. Some of the benefits El Salvadorians are hoping to come to fruition from passing Bitcoin as legal tender include:
- Vendors expressing commodity prices in Bitcoin
- Citizens paying taxes in Bitcoin.
While only in the infancy of execution, there’s substantial hope and belief they’re origins of a potentially revolutionary strategy.
The economy of El Salvador has seen difficult times. El Salvador’s native currency is no longer in circulation. The country depends on the US dollar, which is also subject to market factors such as inflation. With the mediums of exchange compromised, the country chose to use the blockchain-based currency as a solution.
Bitcoin and other cryptocurrencies use blockchain technology, which can lead to a more efficient economy by improving both local and international exchange through the provision of better cross-border transactions and flexible transaction costs. Cross-border transactions are pivotal, especially where sanctions are present. Through Bitcoin, El Salvadorians can work around economic sanctions imposed by the United States and China, as Reuters suggests, following a similar strategy by Venezuela. In addition, reports show a correlation between remittances and the adoption of cryptocurrencies with results suggesting people are using cryptocurrencies for more than just speculative purposes.
Other countries, such as Cuba and Venezuela, facing similar economic turmoil are also adopting Bitcoin and other cryptocurrencies, but not as far as becoming their next legal tender. Holding local currencies in these countries exposes citizens to the dangers of hyperinflation, thus residents have a better chance of transacting internationally (and locally) using crypto. This explains the bustling crypto community focusing on utilizing cryptocurrency, as opposed to accumulating and trading it for the purpose of generating profit.
The underlying theme in these Bitcoin applications is Bitcoin’s viability as a medium of exchange. Largely thought of as a speculative or store-of-value asset, the cryptocurrency challenges the status quo by enabling seamless transactions locally and across borders. Its use as a payment option, store, and measure of value is giving Bitcoin purpose beyond its initial use case.
Challenges In Adoption and Bitcoin’s Potential
Cryptocurrency enthusiasts hail this new development as an important milestone for Bitcoin and other digital currencies. Their recognition as legitimate forms of payment is on par with fiat money; however, there’s a caveat- not many people are using the peer-to-peer digital cash as envisioned.
And here is exactly where lies the opportunity for innovators and entrepreneurs. El Salvador, Cuba, Venezuela, and other countries using cryptocurrency as a means of exchange are showing the potential in Bitcoin as a fully functional currency. With the dollar’s stability dependent on dynamic market factors, we will see a paradigm shift in currency usage in El Salvador.
Similar to the US dollar, Bitcoin enjoys a significant global consensus and can be changed to local currencies via online exchanges as well as ATMs, which are found in hundreds of cities at this point. It qualifies, in principle (and law in El Salvador), as a legal tender and can easily perform the currency responsibilities of the dollar in many countries.
Moreover, Bitcoin measures favorably against traditional fiat and even commodities when comparing scarcity, liquidity and supply. Centrally mismanaged supply is often the persecutor for inflation and hyperinflation. With Bitcoin as a legal tender, El Salvadorians are no longer exposed to such economic adversity. Bitcoin’s scarcity exceeds that of other standards, such as gold. Not only is it finite, but unlike gold, more Bitcoin can not be suddenly discovered on Earth or anywhere else – a risk that many are looking at as we become multiplanetary. Bitcoin has a supply limit of 21 million with measures to restrict supply whereas gold deposits are universal and lack long-term predictability. As our technology develops, so does our ability to tap into the infinite supply of gold and other precious metals.
Under the modern macroeconomic paradigm, governments are the ones to determine and issue legal tender and then regulate its supply through taxation, debt, interest rates, subsidies and regulation. The El Salvadoran government has set progressive precedence for other authorities by making Bitcoin, a non-government issued currency, a legal tender in the country. It provides a radical alternative to government-issued currencies, removing the risk of currency destabilization through incompetence or malice. With El-Salvador leading the way, it is time governments consider dropping their retrogressive cash sentiments and embrace existing cryptocurrencies. Limited by their own centralization, governments can opt to make Bitcoin legal tender to reap the benefits of active decentralization within their respective economies.