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This "unknown" small country struggling to make ends meet caused a big stir with its first move.
El Salvador, a coastal country in northern Central America, recently announced that Bitcoin will become the country's legal tender along with the U.S. dollar starting September 7. As a result, El Salvador became the first country in the world to list Bitcoin as legal tender.
Will Bitcoin go head to head with the dollar? Supporters and critics around the world will be watching the results of this unprecedented experiment.
Bitcoin becomes a national currency
On September 7, Bitcoin officially became the legal currency of a country.
On the same day, President Nayib Bukele revealed on social media that the country had purchased 400 bitcoins. Based on the bitcoin price at the time of the tweet, the total amount of digital currency purchased by El Salvador was about $20.9 million. After the tweet was released, the price of bitcoin rose as expected, and as of 12:00 noon Eastern Time on Tuesday, the trading price was about $52,681.85.
The release of the above tweet marks the most important milestone in the history of Bitcoin development, namely that El Salvador has become the first country to officially include Bitcoin on its balance sheet and store it in its reserves.
In fact, as early as June this year, this developing country with a population of less than 7 million passed a bill to approve Bitcoin as the country's legal currency, which officially came into effect 90 days later. The government said it hopes that the passage of this bill will achieve the goals of attracting investment, facilitating remittances, promoting financial inclusion, and strengthening currency diversification.
However, the bill has not been widely recognized as policymakers hoped, but has been widely criticized nationwide. Since June, protesters have been marching in the streets of the capital. According to data released by the University of Central America, nearly 70% of Salvadorans participating in the survey disagree with the government's decision to adopt Bitcoin as legal tender. And many people also said that they did not know how to use digital currency.
However, supporters of the bill in the country said that as Bitcoin becomes more accepted, other countries could follow suit. The bill also states that prices can be displayed in Bitcoin, taxes can be paid using digital currency, and Bitcoin exchanges do not have to pay capital gains tax.
Digital currency wallets are launched together with online payments, cross-border transfers can be made at any time, and there is zero formalities, etc., which are all mentioned in the official promotion of Bitcoin payments.
At the end of last month, the Salvadoran government released a promotional video about Bitcoin payments. It pointed out that the use of Bitcoin is not mandatory, and people can freely choose to use US dollars or Bitcoin when paying. The country's cash transactions, commodity pricing, salary payments and pensions will continue to use US dollars.
On August 23rd, local time, Bukele revealed on social media that the government is installing 200 Bitcoin ATMs, which will be distributed in 50 financial outlets to support citizens in converting Bitcoin into U.S. dollars. At the same time, the official cryptocurrency wallet Chivo will soon be launched for use together.
In the wallet app, called Chivo, citizens can register with their national ID to make transactions using Bitcoin. When users register to accelerate Bitcoin adoption, they will receive $30 worth of Bitcoin as a small gift to encourage spending.
According to foreign media reports, one-quarter of Salvadoran citizens currently live abroad, mainly in the United States. These overseas workers usually send their overseas wages back to their families. According to data from the Central Bank of El Salvador, the total amount of remittances from overseas residents in the country reached US$5.9 billion last year.
If Bitcoin is used for transfer, the handling fee of up to 10% for each cross-border remittance will be greatly saved. Some economists pointed out that the main use of Bitcoin in El Salvador is actually remittance, "using remittance to save some wealth, perhaps just to compete with the US dollar in the country." According to statistics from the World Bank, remittances account for more than 24% of El Salvador's GDP.
New challenges in financial regulation are inevitable. What is not well known is that the bill to include Bitcoin in legal tender took less than a week from proposal to passage. The free and wild development of cryptocurrencies launched by developers around the world has indeed prompted central banks or monetary authorities in many countries and regions around the world to intensively promote the relevant work of legal digital currencies.
According to the latest survey report of the Bank for International Settlements, currently, about 86% of the central banks in 65 countries or economies have conducted research on digital currencies, and the number of central banks conducting experiments or proof of concept has increased from 42% in 2019 to 60% in 2020. According to relevant public information disclosed in the central bank's white paper, in recent years, central banks in various regions, whether in Europe, the United States or the Asia-Pacific region, have announced their considerations and plans for central bank digital currencies in various forms.
"The Reserve Bank of India is considering introducing a centrally-backed digital currency in phases to protect people from price fluctuations in cryptocurrencies." In late July this year, T. Rabi Sankar, Deputy Governor of the Reserve Bank of India, said when introducing the progress of the Central Bank of India's digital currency that perhaps the era of central bank digital currency (CBDC) has arrived.
At the same time, Sankar also mentioned that the introduction of central bank digital currency may bring more efficient, reliable, standardized and legal currency-based payment options, but it will undoubtedly also trigger related risks, and its benefits need to be more carefully evaluated.
It cannot be ignored that while the process of legal digital currency is advancing, regulators in various countries are also strengthening their crackdown on private cryptocurrencies. For example, the Thai Securities and Exchange Commission approved a new regulation in June this year, prohibiting local exchanges from listing and trading emoji tokens, fan tokens, non-fungible tokens and other virtual currencies.
Since the beginning of this year, the People's Bank of China has also put forward requirements for the banking industry to strengthen the supervision of cryptocurrency transactions. On July 15 this year, the cryptocurrency content community "Coin World" announced that it would stop operating its APP and website from now on. The announcement shows that in order to comply with the provisions of the document of the Operation Management Department of the People's Bank of China involving the field of virtual currency and cooperate with the industry rectification requirements of the regulatory authorities, the community APP and website will stop operating in China.
Reducing transaction costs, monitoring financial transactions, and better protecting privacy under a loosely coupled account model are obvious benefits that digital currency can bring based on its own characteristics, but new regulatory challenges also come with opportunities. Financial regulatory authorities in various countries remain cautious about the introduction of legal digital currencies.
Not long ago, the International Monetary Fund (IMF) stated that some countries choose to adopt cryptocurrencies as their national currencies, which may indeed have advantages such as security, easy access and low transaction costs, but in most cases, the risks and costs outweigh the potential benefits. The IMF also warned Nigeria and other countries not to adopt crypto assets as their national currencies to avoid weakening monetary policy and causing macroeconomic instability, and forcing banks and other financial institutions to face the strong volatility of the cryptocurrency market. |
