As of Tuesday September 7 2021, El Salvador officially made Bitcoin a legal tender. This means that companies have to accept Bitcoin as a form of payment. El Salvador is the first country to take this step and other countries are curiously following this experiment. A bold move that could turn out to be genius or an absolute failure.
The optimal case for Salvador
If everything goes right, El Salvador will successfully implement Bitcoin as legal tender. Companies will accept Bitcoin all over the country. And 70% of the population that does not have bank accounts will now have a digital wallet. As a result, all payment fees for money transfers to foreign countries will be greatly reduced.
If all goes right, the government will continue buying Bitcoin. It currently holds 550 Bitcoin and the country will launch a digital currency mining infrastructure that will support the whole country.
In the optimal case, Bitcoin will gain main street adoption, rises in price and will make El Salvador and its people extremely wealthy. Thus, making a poor country rich in a very short time. Other countries would adopt Bitcoin as legal tender giving Bitcoin more and more credibility.
Worst case scenario for El Salvador
The IMF (International Money Fund) has already criticized El Salvador for this move, saying that Bitcoin is too volatile and risky to become legal tender. The IMF has also stated that they will not work with El Salvador in this matter. However, critics believe that the IMF feels threatened by Bitcoin. They are worried about staying relevant in a world where decentralized digital currencies rule.
Lets say that the IMF proves to be right and adopting Bitcoin as legal tender for El Salvador turns out to be a great mistake. What are the risks?
The Bitcoin price could plummet and all the money that the El Salvadorians and the government put into it would make the country even poorer. This would most likely mean the end of president Bukele’s presidency. Some critics on Twitter see this scenario happening:
Another risk is that the El Salvadorians will not use the infrastructure and keep on using US Dollar to conduct payments. Indeed, using Bitcoin will require the El Salvadorians to become more technologically savvy.
And lastly, the IMF could be right that Bitcoin is too volatile to use as a legal tender. Volatility could cause people losing money in the short term and scare people off. This could already be seen in the flash crash that happened on Wednesday, September 8th 2021, the actual El Salvadorian Bitcoin day, where Bitcoin plummeted 10% within minutes.
Bitcoin has so far not been used for payments in a large scale and was considered to be suited as a store of value. It will be interesting to see how El Salvador will deal with the volatility issue.
A chance for a country to turn things around
All in all, president Bukele is taking a big risk. But he is also taking a chance for his people and for himself. If this experiment works out, El Salvador as a country and its people could become incredibly wealthy. Bukele would become a national hero. If it doesn’t, it will probably mean the end of his political career and potential further financial problems for his people. Whatever happens, Nayib Bukele will be remembered for this bold move.
What this means for Bitcoin
For Bitcoin this is a real test. Maybe the biggest ever. If it succeeds as a legal tender, it could turn into a revolution and would soon be adopted by other countries as well. Several Central American and South American countries are in talks about adopting Bitcoin and they are surely taking a close look at El Salvador in the coming months.