El Salvador passed a law in June 2021 that, as of Tuesday 7th September, has put Bitcoin into effect as a legal tender alongside the US dollar. Businesses will therefore have to accept it as a valid form of currency, and while the government has done this to boost economic development and employment, this unprecedented move may perhaps set off a debate in regard to cryptocurrency acceptance around the world. There have been both positive and negative responses to the country’s decision, about both the dangers and opportunities of integrating a form of cryptocurrency in a country’s economy.

Created in 2009, Bitcoin is the largest and most renowned form of cryptocurrency, and while it is completely virtual, it has been rather volatile in its value. It is not issued or backed by any official bank or government, hence the criticism it receives for its fluctuations. Recently, in May 2021, the currency took a hit once Tesla owner Elon Musk decided to scrap it as a payment method but has since quickly recovered its value to over $50,000 in August 2021.

How did this happen?

The country has bought around $20.9 million worth of Bitcoin – equivalent to 400 Bitcoin that will now be added to its balance sheet. Once 200 coins had already been bought, President Nayib Bukele tweeted that brokers will be continuing to buy more Bitcoins as the deadline approaches. The El Salvador government will start to distribute the currency through the country and will do so by giving £22 to every citizen that downloads the country’s new digital wallet app.

Another 200 cash machines are also being installed, through which dollars can be converted into Bitcoin for ease of access. Essentially, the government is hoping that the move will allow for more financial inclusion, as many citizens do not have access to traditional financial services. It will be incorporated into the system so that prices and transactions can also be viewed in Bitcoin value, with exchanges also not being subject to any capital gains tax.

A mixed response

Although the consequences of a move as new and controversial as this has not fully manifested itself yet, there has been a flood of mixed responses across the world. While some Bitcoin fans are showing their support by also purchasing £22 worth of the cryptocurrency to boost the value of the currency, others have shown concern for the volatile nature of it. A survey done by the Central American University reflected that 70% of Salvadorians disagreed with the decision, which was partly fuelled by the fact that there is not enough knowledge about the currency and how it should be used.

Furthermore, the World Bank has also advised against the decision, with fears that the country is not ready for a move so drastic. Protests in the capital of San Salvador have clearly demonstrated the lack of confidence that citizens have in a currency that has been reputed for being notoriously unstable, with only 4.8% of a total 1,281 survey participants understanding what Bitcoin was and how it was used.

What to expect

The coming few months will give the financial world a better understanding of how cryptocurrency may impact the functions of an economic system; whether Bitcoin boosts or potentially harms the El Salvador economy, there is now a practical model that will allow analysts and other governments to understand the power of cryptocurrency on a larger scale.

What the decision has also shed light on is the lack of education that many have in regard to virtual currencies – whether or not this will be remedied by the fact that it is now a legal tender is yet to be seen. It will undoubtedly take time for Bitcoin to be fully integrated and functional within the system, however, it will be worth paying attention to events as they unfold and whether other countries will follow or avoid the example that El Salvador has set.

About the Author: Nandini Mehta

Nandini Mehta is a contributing Features Writer focusing on the development of technology and business practices around the world. Nandini has an in-depth knowledge of politics and international relations, and so writes pieces that utilise her interest for current affairs.