Foreign media: El Salvador admits that the pros and cons of Bitcoin are unpredictable

El Salvador will become the first country in the world to recognize Bitcoin as legal tender on September 7, Reuters reported from San Salvador on September 6. The country's President Nayib Bukele said the move would save Salvadorans living abroad millions of dollars in remittance fees. Despite Bukele's popularity, many Salvadorans are skeptical of the move, concerned about the volatility of the cryptocurrency and how Bukele's plan will work. Here are some of the pros and cons of El Salvador's plan, which was first proposed in June.

money transfer

Last year, Salvadorans sent nearly $6 billion in remittances from abroad, mainly from the United States, a figure equivalent to about 23% of the country's gross domestic product.

Bukele said last month that bitcoin would be a "huge benefit" because it would save Salvadorans money on remittances, which he said cost them $400 million a year.

But many Salvadorans who send or receive dollars do not trust Bitcoin.

Meanwhile, the dollarized Central American country already has one of the lowest costs in the world for sending remittances to the United States, according to the World Bank.

Carbon Footprint

El Salvador’s bitcoin plans have put the spotlight on the environmental impact of cryptocurrencies, with the World Bank expressing concerns about these potentially harmful effects.

Bank of America said in March that obtaining digital currencies from cyberspace requires a lot of energy, and the global carbon dioxide emissions of the Bitcoin industry have risen to 60 million tons, equivalent to the exhaust emissions of about 9 million cars.

Bukele has sought to allay concerns about sustainability, saying in June that he had instructed state geothermal power company Laho to develop a plan to provide bitcoin mining facilities using renewable energy from the country’s volcanoes.

Regulatory Compliance

While Bitcoin supporters tout it as an innovation immune to the whims of government, some warn it could increase regulatory, funding and operational risks for financial institutions, including under international anti-money laundering and terrorism financing rules.

In June, Fitch Ratings noted: “Capital gains will not be taxed and taxes can be paid in Bitcoin, which could attract foreign Bitcoin inflows into the country. This could increase the risk of proceeds from illicit activities flowing through the Salvadoran financial system.”

The International Monetary Fund has cited legal concerns about bitcoin adoption amid talks with El Salvador on a nearly $1 billion financing deal.

Moody’s Investors Service downgraded El Salvador’s credit rating after Bukele’s bitcoin bill passed. The country’s dollar-denominated bonds also came under pressure.

Foreign Exchange

Bukele has set up a $150 million fund to enable bitcoin to be exchanged for dollars, but doubts remain about how the country will avoid risks associated with the digital currency's wild swings, whose value can vary by hundreds of dollars in a single day.

Fitch believes that for Salvadoran insurance companies with Bitcoin exposure, higher foreign exchange and earnings volatility risks arising from Bitcoin would have a negative impact on their ratings.

“Insurance companies that hold bitcoin on their balance sheets for the long term will be highly vulnerable to bitcoin price volatility, increasing asset risk,” Fitch said last month.

Still, for those who hold bitcoin, it has proven to be a popular payment method in the El Salvadoran beach town of Sonte.

As long as there are no barriers to exchange, Bitcoin may have the potential to become an important source of foreign exchange.