El Salvador’s proposed national stablecoin “Colón-Dollar”

Golden Finance Blockchain reported on July 18 that according to El Faro, a local news media in El Salvador, the government is planning to allow its citizens to use US dollar stablecoins and Bitcoin.

El Salvador recognized Bitcoin as legal tender for the first time in June, and now they want to go a step further and issue a national, dollar-backed stablecoin.

According to a report by local news outlet El Faro, the Salvadoran government may be planning to issue a dollar stablecoin. The currency will be issued by the central bank, pegged to the price of the U.S. dollar, and backed by actual U.S. dollar reserves. It is reported that El Faro obtained a private meeting video that revealed that the brothers of the President of El Salvador were discussing with the President to launch a dollar stablecoin nationwide next year. Although these people are not government officials, they often advise the President.

The cryptocurrency will be named “Colón-Dollar,” a reference to the country’s former national currency, the colon, which was replaced in 2001 by the U.S. dollar, which locals have adopted as currency. According to the Central Bank of El Salvador, 90% of the currency in circulation is currently in dollars, leaving the colon largely aside.

In fact, El Salvador's domestic economy is mainly based on agriculture, and its industrial foundation is weak. In recent years, affected by the international economic and financial crisis, El Salvador's economic growth has been slow. In 2019, its GDP was only US$26.75 billion, and its unemployment rate was as high as 6.3%. It is not difficult to see from these circumstances that the local government may hope to stimulate economic growth by issuing US dollar stablecoins, but whether this approach can succeed remains to be seen.

It is worth mentioning that the meetings mentioned in the El Faro report all took place after Salvadoran President Bukele announced in June that Bitcoin would soon become their legal currency. According to El Faro, senior government officials, private contractors and external consultants attended such meetings. However, the report also stated that a government spokesman said that El Salvador's US dollar stablecoin plan had been canceled, but then claimed that the plan was still in progress and the news came from ongoing negotiations.

According to El Faro, Ibrajim, the brother of the President of El Salvador, also added that they hope that all cryptocurrencies can become legal tender in El Salvador. Ibrajim said: "But to do this, we must have the support of government infrastructure."

El Salvadoran President Bukele announced the plan at the 2021 Bitcoin Conference in Miami last month, making El Salvador the first country in the world to recognize Bitcoin as legal tender. Although Bukele is very popular in the poor and crime-ridden country of El Salvador, he has been criticized for his treatment of gang members, attacks on the media and pressure on parliament and Congress.

On the other hand, JPMorgan, US officials and even investment banks such as the World Bank have expressed concerns about how the country's Bitcoin laws will be formulated. JPMorgan experts also noted that Bitcoin's high volatility could pose a huge challenge to El Salvador's dual currency system and official dollar mechanism. The report also talked about the imbalanced demand for Bitcoin/USD exchange on the government platform, which could erode onshore US dollar liquidity and trigger fiscal and balance of payments risks. Last month, El Salvador sought technical assistance from the World Bank to help it achieve the use of Bitcoin as an official currency, but was also rejected. The World Bank said that it could not help El Salvador implement Bitcoin-related bills due to environmental and transparency deficiencies. At the same time, the International Monetary Fund (IMF) also believes that El Salvador's adoption of Bitcoin as its official currency has macroeconomic, financial and legal problems.

Currently, daily payment activity in El Salvador accounts for about 4% of recent on-chain transaction volume and more than 1% of the total value of BTC transferred between wallets in the past year. The lack of liquidity combined with such transaction volume may severely limit Bitcoin's potential as a medium of exchange, which may be the original intention of President Bukele to launch a national stablecoin based on the US dollar.

However, ideals are full of hope, but reality is very skinny. After launching a series of digital currency plans, this small Central American country does not seem to have achieved the expected goals, but in any case, El Salvador has set an example for the world, with both lessons and experience.