El Salvador and the Bitcoin: Political ploy or watershed moment?
El Salvador recently became the first country to adopt bitcoin as legal tender. The country’s president, Nayib Bukele, delivered on his promise at the crypto event in Miami to send a bill to parliament aimed at legalizing bitcoin as a complementary currency (in addition to the US dollar). Expectedly, this was greeted by both jubilation and indignation in different quarters, depending on which side of the cryptocurrency divide each expert was on.
Arguments in favor of bitcoin
In his argument for adopting bitcoin, the president cited a number of factors which spurred his interest in alternative financial instruments. Foremost, the high transaction cost of transferring funds via traditional financial channels. About 25% of the country’s citizenry live in the United States and make annual remittances which make up over 20% of the country’s GDP. Thus a high transaction cost necessarily means that a huge chunk of the remitted funds end up in the coffers of financial services providers. In this case, the promise of lower transaction cost and absent middleman by the cryptocurrency community is good news to El Salvador and other developing countries in similar situation.
Furthermore, the president bemoaned the lack of access to basic banking services by over 70% of the country’s population. Unsurprisingly, this stems from (and/or leads to) a huge informal economic sector which negatively impacts the government’s ability to efficiently collect taxes. It also cuts off majority of the country’s economic actors from the global economy. The president sees bitcoin as a potential solution to the aforementioned problem. This is especially so since majority of these previously unbanked population are already using bitcoin for various transactions.
Beyond the arguments
While the president clearly fleshed out problems with the financial system as it is currently structured, some people have a different opinion on the move. For some, the decision to appear in Miami as well as push through the bill in parliament is aimed at drawing attention away from the government’s questionable human rights and constitutional records, including the recent unilateral dismissal of judges. Other examples abound.
Furthermore, other experts have questioned the rationale behind adopting an instrument infamous for extreme volatilities due to factors for which the country has little or no control. The recent crash in prices thanks to a tweet by Elon Musk is a case in point. Added to this is the inability of the government (through its central bank) to respond in times of economic crises by increasing monetary supply as way of preventing and/or responding to recessionary tendencies. This begs the question of how much benefit versus cost El Salvador will face if the legalization is finally operationalized.
Concluding Thoughts
Personally, the takeaway from the cryptocurrency saga so far (from crackdowns, through outright banning to heedless praise) is one of people talking past rather than to one another. People in both camps are so sure of their views that it is almost abominable to listen to the arguments of the other side. This is counterproductive.
Are there problems with cryptocurrencies as a class especially considering current use cases? No doubt. The recent ransomware saga involving Colonial Pipeline is a case in point. But the argument could be made that such attacks would still occur with or without cryptocurrencies. Furthermore, the increasing use of cryptocurrencies especially by scammers and other cyber fraudsters has especially tarnished the image of digital currencies in developing countries (including Nigeria where I am from and live). Ironically, it is these countries whose current financial system (and its inadequacies) stand to benefit heavily from the characteristics of digital currencies, especially in their ability to connect the informal sector to the global economy.
In conclusion, regardless of which side of the currency divide you occupy, and regardless of people’s views of the real rationale behind El Salvador’s adoption of cryptocurrency, the move is a bold one. It might prove a remarkable success or a colossal failure. Nonetheless, it is a move that a lot of developing countries are sure to closely observe especially in light of the above arguments. Will adoption of cryptocurrency help integrate more people in developing countries to the global economy? Will it help solve the intractable problem of informal economies both for government and people alike? Will it help spur innovations in the underlying blockchain technology to further address other problems in developing countries? These are questions worth considering. Maybe it’s high time the traditionalists and the disruptors started talking to one another.
