El Salvador becomes the first country to use Bitcoin as legal tender? Is it just a marketing gimmick or a way to solicit donations?

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

Today, Salvadoran President Nayib Bukele released a video through the Bitcoin 2021 Miami Conference, claiming that he would submit a bill to make Bitcoin the country's legal tender (Legal Tender). Subsequently, Nayib Bukele also posted a message in support of Bitcoin on Twitter and added the popular "laser eyes" in the currency circle to his Twitter avatar.

This news made headlines, but I believe the first question most people asked was, "There is such a country? Where is it?"

According to Wikipedia, El Salvador is located in the northern part of Central America, with an area of ​​21,041 square kilometers, slightly smaller than Nanning (22,099 square kilometers) in my country. El Salvador has a population of 6.3447 million, slightly less than Nanning (7.2541 million). El Salvador's per capita GDP is US$4,000, less than half of Nanning (US$8,918).

El Salvador’s desire to use Bitcoin as legal tender may be bold, but it is virtually impossible to implement.

1 Natural technical limitations

In recent years, the Bitcoin network has been in a state of congestion, and its ability to process on-chain transactions has reached its upper limit. According to bitinfocharts, in the past 24 hours, the BTC network processed 181,006 transactions, while the total population of El Salvador is more than 6 million. In other words, even if the current Bitcoin network is only used by El Salvador, it is not enough for the average Salvadoran to send one transaction per month. For legal currency, such capacity is obviously unable to cope with daily needs.

BTC's expansion plan is the Lightning Network, but after several years of development, there are still few users. Moreover, the use of the Lightning Network also requires sending Bitcoin to the Lightning Network through on-chain transactions. Even the recharge demand of El Salvador cannot be met by the current Bitcoin network. In addition, there is the issue of recharge fees. El Salvador's per capita GDP ranks 111th in the world, and 29.2% of the people are poor (disposable income is less than $5.5 per day). When the Bitcoin network is congested, the transaction fee is tens of dollars, which is obviously unaffordable for most Salvadorans.

In April this year, a Twitter user named @rip44614726 complained to Phoenix Wallet, a lightning network wallet, that he received a message that the Bitcoin network's memory pool was full, the fees were too high, and it was temporarily unable to accept transfers. For legal currency, such a network is obviously not stable enough.

2 Economic problems

For legal tender, it is made into legal currency through national decrees, and no one can refuse it. However, at the same time, the state also needs to assume corresponding obligations, that is, to maintain the stability of the currency. When the currency is not stable enough, people tend not to use it, even if it is the legal tender of the country.

When a currency faces huge inflation, people tend to spend the currency that is about to depreciate as soon as possible, and no merchants are willing to accept it. This scenario happened in Zimbabwe a few years ago or in the Republic of China decades ago. In this case, people tend to abandon legal tender and use more stable "currencies", such as US dollars or rice.

When a currency faces huge deflation, people tend to keep it and not spend it, and the currency that has lost its circulation significance is not legal tender. This situation rarely happens in human history, after all, most currencies are inflationary in the long run. But in the history of Bitcoin, this kind of thing often happens, the most obvious example is the programmer who spent 10,000 Bitcoins to buy two pizzas.

The biggest obstacle for Bitcoin to become a legal tender is its huge volatility. Imagine that a pizza shop in El Salvador uses Bitcoin, a "legal currency", to set prices. Does it need to change prices every day? If a company pays employees in Bitcoin as wages, can it pay a fixed amount every month regardless of the huge fluctuations in the value of Bitcoin? If the currency cannot be used to price daily goods or services, then the currency obviously cannot become legal tender.

The most that El Salvador could do is to price in a stable currency like the U.S. dollar and settle in Bitcoin, just as Tesla did with Bitcoin. However, in this case, the actual legal currency is the U.S. dollar, but it is covered with a Bitcoin coat.

3 The true intentions of the President of El Salvador

For a politician, reputation is important, and whether one can realize his own program is another matter. In the political field, trying to promote Bitcoin as legal tender is not new. According to the report of Time magazine, as early as 2016, Iceland's "Pirate Party" tried to promote Bitcoin as the country's legal tender. In the future, whether Bitcoin can become the legal tender of El Salvador, overnight, this small Central American country and its president have become well-known at least in the currency circle. From the perspective of exposure, the president's goal has been achieved.

As for the news that a village in El Salvador should start implementing the Bitcoin economy, the truth is that a donor found a forgotten USB flash drive containing Bitcoin, so he donated hundreds of thousands of dollars to the village every year to build a "Bitcoin Beach". The total population of the village is only 3,000. In other words, this implementation is completely based on donations, not rational considerations. Therefore, the president's announcement may be in the hope of obtaining more donations to some extent.