Observation | An overview of El Salvador’s BTC initiative: a discussion of macroeconomic, financial and legal issues

On June 9, the El Salvador Congress voted to approve the president's proposal to make Bitcoin a legal tender, making El Salvador the first country in the world to recognize Bitcoin as a legal tender. El Salvador's Bitcoin initiative has attracted much attention, and issues such as Bitcoin-related laws and financial impacts have also sparked heated discussions.

Experts are divided on the adoption of Bitcoin in El Salvador, as observers say its use in money laundering and illegal transactions is contrary to long-term opportunities under current macroeconomic conditions. Other experts believe that it is good to see El Salvador become the first country in the world to officially adopt a digital currency. This is a big step for Bitcoin and cryptocurrencies, as this is the first time a nation-state has approved a cryptocurrency as legal tender.

Positive Embrace

Salvadoran President Nayib Bukele noted that El Salvador’s acceptance of Bitcoin as legal tender was one of the 14 most important events in 12,000 years of “monetary history.” Due to the Bitcoin effect, Google searches for “El Salvador real estate” also spiked.

With El Salvador passing a law to make Bitcoin legal tender, lawmakers from many Latin American countries have expressed interest in Bitcoin. These countries include Paraguay, Argentina, Panama, Brazil, and Mexico. Tonga and Tanzania have also reportedly expressed interest in Bitcoin. Panamanian Congressman Gabriel Silva also said he is working on a proposal to include Bitcoin and other cryptocurrencies as legal tender in the country.

On June 13, Alex Gladstein, chief strategy officer of the Human Rights Foundation, said in an interview that El Salvador's choice of Bitcoin as legal tender is more significant than establishing a digital currency that the government can control more. Bitcoin's role as a fast, borderless payment tool is becoming increasingly important. "Most people don't think of Bitcoin as money, but what if it really becomes money? What would it look like? This is exactly what we're seeing. Bitcoin has certain significant features that enable it to connect people in different parts of the world. Therefore, my view is that we are entering the next narrative stage of Bitcoin, where a country is enacting or adopting Bitcoin, not as an asset on its balance sheet, but as legal tender."

In addition, Tonga may become the next country to adopt Bitcoin. Lord Fusitua, a member of the House of Lords, said that he and Jackmallers hope to buy Bitcoin with the country's $750 million reserves, accounting for 37% of its GDP.

Regulatory Discussion

El Salvador residents are divided over the idea of ​​Bitcoin becoming legal tender, with some excited about it and others concerned it could simply be a tool for official corruption and authoritarianism.

In addition, El Salvador's historic acceptance of Bitcoin has triggered a major discussion on related policy regulations in other countries and regions. The New Indian Express said that this has led the Indian government to consider Bitcoin as an asset class in the country. Sources revealed that a new bill on crypto regulation may be submitted to the parliament for discussion during the monsoon session.

Benoit Coeure, head of the Bank for International Settlements' Innovation Hub: El Salvador's adoption of Bitcoin as legal tender is an interesting experiment. We believe that Bitcoin is a speculative asset and should be regulated.

European Central Bank (ECB) President Christine Lagarde also shared her thoughts on El Salvador making Bitcoin legal tender. She stated: “There has been no change in the Central Bank’s policy towards Bitcoin and other cryptocurrencies, and this certainly does not change our approach to crypto assets and the regulation, supervision and appropriate classification they should be subject to to avoid misinformation and misleading statements.”

In addition, the U.S. Senate Economic Policy Subcommittee may hold further hearings on cryptocurrencies. Senator Cynthia Lummis compared El Salvador’s recent bill to adopt cryptocurrency as legal tender with possible U.S. approaches.

There are macroeconomic, financial and legal issues

The International Monetary Fund (IMF) said that El Salvador's use of Bitcoin as legal tender raises a series of macroeconomic, financial and legal issues. Crypto assets may pose significant risks, and effective regulatory measures are important when dealing with them.

“We view bitcoin headlines in El Salvador as noise that could complicate discussions with the IMF,” Citi said in a recent note to clients, further reducing the bank’s already underweight exposure to the country.

“Crypto is a very fringe story for the El Salvador investment thesis,” said Patrick Esteruelas, head of research at Emso Asset Management in New York.

Wang Yongli, chief economist of Shenzhen Neptune Group, pointed out in an interview that some countries that lack sovereign currencies lack the most basic understanding of currency. Using completely decentralized digital encrypted assets such as Bitcoin as legal tender will inevitably seriously disrupt economic and social operations due to their own sharp price fluctuations. The country has no means of regulation and can only seek its own destruction.

JPMorgan Chase & Co has also poured cold water on El Salvador’s big decision to adopt Bitcoin as its official currency. In a recent report, JPMorgan wrote that it’s “difficult” to see any “tangible economic benefits” from Bitcoin adoption. JPMorgan added that El Salvador’s decision to adopt Bitcoin as its second form of legal tender could jeopardize its negotiations with the International Monetary Fund (IMF). Worse still, JPMorgan claims that the event could affect the way the larger economy treats Bitcoin.