El Salvador is first country in the world to adopt bitcoin as a legal tender, triggering speculation that other Latin American countries will follow suit. But, judging from what I hear from leading experts, I’m skeptical that El Salvador’s bitcoin experiment will get very far — even within that country.
There are reasons to believe that Salvadoran President Najib Bukele pushed for the “Bitcoin Law” and announced its passage on June 8 to divert public attention from international criticism over his increasingly authoritarian rule.
The law is scheduled to go into effect within 90 days, after which it will be mandatory for merchants to accept the crypto-currency as a form of payment — unless they can prove that they don’t have the technology to do it. It will also allow people to pay taxes in bitcoins.
Bukele, 39, says the new law will help Salvadorans save money in banking commissions that Salvadorans living in the United States pay when they transfer funds to relatives back home. Family remittances from abroad account for 21 percent of El Salvador’s economy, according to the World Bank.
In addition, Bukele says that adopting bitcoin as legal tender will turn El Salvador into a magnet for international technology entrepreneurs and drive up foreign investments.
As for the huge amounts of energy that would be needed to make bitcoins, Bukele says that El Salvador could use its volcanoes as a renewable source of geothermal energy to produce them. It is estimated that the world’s annual production of bitcoins consumes the energy equivalent to that of Argentina.
Problem is, most of Bukele’s arguments to support his law are flawed.
First, making international Bitcoin transactions is a complex procedure, or at least more complex than sending a wire transfer. A huge percentage of Salvadorans don’t have access to the internet. If they find it hard to make banking transaction, they will find it almost impossible to make a bitcoin transfer.
Second, bitcoin is an unstable currency. It dropped from $63,000 per unit in April to $40,000 this week. The U.S. dollar, which El Salvador adopted as its legal currency in 2001, is much safer.
“If you are a roadside vendor in El Salvador, why would you accept bitcoin when you know how volatile it is?,” Lee Reiners, head of Duke University’s Global Financial Markets Center, told me. “They’ll still going to maintain the U.S. dollar as the legal currency in El Salvador. It has actually worked out pretty well for that country.”
Third, I wonder whether the “Bitcoin Law” will attract the right kind of foreign investors. Instead of technology entrepreneurs, it may attract the drug cartels and other criminal organizations that want to take advantage of the anonymity provided by crypto-currency transactions.
On June 14, the Salvadoran Association of Economic Sciences Professionals issued a statement calling on the country’s National Assembly “to nullify” the law, because, among other things, it could promote “illicit activities.”
Bitcoin “can’t be used for licit international transactions, because it has not been legally adopted by any other country,” the Association said. “It could be used to foment illegal commerce and money laundering,” it added.
So, don’t get too excited about Bukele’s bitcoin law. It’s most likely political theatrics — a distraction from the his recent attempts to grab absolute powers.
On May 1, his party’s congressional majority fired five key members of the Supreme Court and the country’s attorney general. The Biden administration and several other democracies denounced the move.
I wouldn’t be surprised if, rather than a world trend-setter, El Salvador’s bitcoin law ends up being like late Venezuelan demagogue Hugo Chavez’s 2006 “Great Pipeline of South America” or Nicaragua’s dictator Daniel Ortega’s 2013 “Trans-Oceanic Canal” — grandiose mega-projects that were announced with great fanfare, but that never got off the ground.
El Salvador’s plan to become a world bitcoin power — and to use its volcanoes as an energy source to produce the coins — will most likely be just another tropical pipe dream.
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