In parallel with China’s plans to issue e-CNY (digital Yuan) and CBDCs (central bank digital currencies) of Sweden, South Korea, El Salvador is the sixth country (beside the cohort of small Caribbean states – the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada), which has officially launched virtual currency as a legal tender. However, Salvador was the first to legalize Bitcoin tokens as a mean of payment.
The President says the country has already purchased 550 bitcoins, equal to just 0.00275 per cent of the outstanding value. Bitcoin’s aficionados around the world showed their support for El Salvador by each buying $30 of bitcoin. Still, it did not help bitcoin to fall 3 days ago, which was at $46,776.65, at the end of the day on Sep, 6, 2021, down by 9.9%, after 11% growth over preceding 7 days.
Last week, government took its bitcoin e-wallet offline for several hours after tens of thousands of people tried to download the app overloaded servers. The administration of President Nayib Bukele, plans to spend additionally more than $225 million on the rollout, including a $30 credit in bitcoin to those who take up Chivo (slang meaning “cool” on the local dialect of Spanish) – the government-run e-wallet that can be used to buy a cup of coffee, get a haircut or even pay taxes and home loans in bitcoin or U.S. dollars.
On the side of crypto-traders, Coincaex, a Central American foreign-exchange platform to buy and sell bitcoin or U.S. dollars aims to be among the first foreign bitcoin service providers to get a license from the central bank. The Salvador’s government is also rolling out a network of 200 bitcoin ATMs and building a chain of stylish, Chivo-brand kiosks with staff who will introduce consumers to bitcoin at plazas around the country.
Data from CoinGecko shows it was not the largest mover. Ethereum leapt 16 per cent over the past week. Solana’s tokens rose 69 per cent. Trading apps make it easier for retail investors to buy crypto. The Coinbase initial public offering in April raised its profile, leading to a jump in downloads.
The make-believe world of non-fungible tokens, or NFTs (see Note at the bottom of the article), has also given cryptos a boost. These prove ownership of digital assets such as art, music or even virtual pet rocks. Many use the ethereum network. Solana has its own NFT marketplace, Solanart.
Rising prices mean the total market value of cryptocurrencies has reached nearly $2.2tn. It is closing in on the previous record of $2.57tn set in May. Bitcoin’s share of the market has fallen. It is now about 40 per cent, down from 57 per cent a year ago. Yet bitcoin remains a bellwether of the token market.
There are no sensible reasons for these moves, teething problems with El Salvador’s digital wallet included. The country is not expected to make other virtual currencies legal tender. Instead, the swings reflect a mix of low rates, blind faith and better investor access. The crypto asset has proved to be much more volatile than traditional currencies, as it lacks economic fundamentals to support its value and trades entirely on sentiment.
As none of this has anything to do with El Salvador’s attention-seeking adoption of bitcoin, this move diverts domestic attention from the failing economy of this impoverished central American country, the first nation to embrace bitcoin as legal tender. It also supplied cheerier news flow to bitcoin fans than the cryptocurrency’s collapse in value this spring.
The stakes are high for the indebted country of 6.5 million. Economists say bitcoin’s sharp fluctuations risk denting the tax revenue and foreign-currency reserves of a government that has neither the policy tools nor the financial firepower to contain a speculative attack.
There are pros and cons of these indeed risky steps:
The government is betting taxpayers’ money, more than $200 million, in highly volatile virtual assets.
The International Monetary Fund also advised against the adoption of privately issued tokens that bypass authorities and open doors to illicit transactions. Government officials respond by the argument that bitcoin’s adoption will lead to affordable financial services in a country where an estimated 70% of the workforce operates in a vast underground, cash-based economy.
Part of business owners applauded the government’s initiative because it widens payment options for clients with an easy-to-use mobile app that eliminates costs such as the credit-card fees that banks charge to merchants.
Financial-services companies, which are the main channel for the $6 billion in remittances that El Salvador receives each year from migrants living in the U.S., will accept payments in bitcoin, but the funds will be immediately converted into dollars. Their top concern will be how to prevent federally regulated banks in the U.S., which provide financial services to banks in El Salvador, from cutting ties because of due diligence and compliance risks, American banks most likely shy away from Bitcoin based transactions.
Note: According to investopedia.com, non-fungible tokens or NFTs are cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies , they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.
NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs can be used to represent real-world items like artwork and real-estate. They can be also used to represent peoples identities, property rights, and more.