Tracking The Bitcoin Experiment in El Salvador
October 18, 2021
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by Stephen Kanyi

Early September this year El Salvador became the first nation to make Bitcoin legal tender. I use the word first here intentionally, but as of this time, I should add ‘the only nation’ since no other country has dared followed El Salvador’s example.

Such is the nature of this move. We are in unchartered waters here. No nation has so far dared to follow El Salvador’s example, they are waiting for the results. And one month into it, what can we say about this experiment?

Well, it is too early to call it. And, quite frankly the result is a mixed bag. Critics have been quick to point out the volatility of Bitcoin causing uncertainty therefore losses in a nation already crippled with poverty. Without central banks, they argue, there is no way to protect the nation from the booms and busts that are the nature of cryptocurrencies.

For instance, the currency plunged by 17% this month to its lowest level this month. Moreover, the government had some reported technical problems with the rollout and had even disconnected its Bitcoin wallet last week Tuesday to fix these glitches.

The country’s young tech-savvy president Nayib Bukele responded in a tweet later announcing that the app was available again for download. He added that the government had taken advantage of the crash by “buying the dip.” They added 150 coins taking their total holding to 550, worth around $26 million in today’s market.

The 40-year-old president has backed this plan saying it would help provide essential financial access to the unbanked. One of the nation’s main sources of income is remittances sent from migrants abroad. These totalled around $6 billion last year. Bukele is of the idea that Bitcoin can help save $400 million in transaction fees for Salvadorians.

Currently, the administration has installed over 200 Bitcoin ATMs around the country where one can exchange digital coins for U.S dollars. His finance Ministry also created a $150 million fund at the state bank Banco de Desarrollo de la Republica de El Salvador, Bandesal to finance transactions.

While there is no question as to the level of risk involved in this move, it makes for an interesting experiment. El Salvador is a small developing country and one may wonder whether its government should have better priorities than speculating with crypto-coins.

One should however remember that the impoverished nation has few natural resources to fuel its growth. Its populace also lacks the necessary skills and education to power economic growth and this is even made worse by the nation’s lacking state of infrastructure. It is thus understandable when a tech-savvy president decides to go the crypto way. Betting his nation’s future on a completely unregulated and uncontrolled currency.

That said, innovators always sound crazy at first, this is the nature of any new venture. Succeed and other nations, especially developing ones, follow suit. Fail and the rest of the world learn a lesson on what not to do with Bitcoins.

Now I admit I am crypto-enthusiast and hope this experiment succeeds. However, it would be foolish of me not to point out how big this risk is. It lays the nation open to volatility to international price changes. El Salvadorians could pay the price for events completely out of their control, say maybe a Chinese ban on Bitcoin trading in the country.

Whatever you might think about this move we can all agree that it is brave. As a crypto-enthusiast, I surely hope that this risk pays off, big time!

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