{"id":138108,"date":"2021-09-29T20:41:14","date_gmt":"2021-09-29T15:11:14","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=138108"},"modified":"2021-10-01T19:23:34","modified_gmt":"2021-10-01T13:53:34","slug":"el-salvadors-crypto-foray-offers-a-cautionary-tale-for-other-countries","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/el-salvadors-crypto-foray-offers-a-cautionary-tale-for-other-countries\/","title":{"rendered":"El Salvador’s crypto foray offers a cautionary tale for other countries"},"content":{"rendered":"\n

Synopsis<\/strong>:\u00a0The tiny Central American nation of El Salvador has embarked on an interesting experiment by recognizing bitcoin\u00a0as legal tender. This is proving painful for many of its citizens, but it\u2019s a useful \u201cpilot\u201d project for larger economies that are contemplating about this new asset class.<\/p>\n

Introduction<\/strong><\/h5>\n

El Salvador has a population of 6.5 million and GDP of about $27 billion. At a nominal per capita of less than $4,200, it is not a rich country.<\/p>\n

In 2001<\/strong>, it \u201cdollarised<\/strong>\u201d meaning it replaced its currency, then the colon<\/strong>, with the USD.<\/p>\n

This month, at the urging of its President, a crypto-enthusiast, it adopted bitcoin\u00a0as legal tender as well. This means it now has two parallel legal currencies<\/strong>, USD and\u00a0bitcoin.<\/p>\n

Every business in El Salvador, must accept bitcoin as legal tender for goods or services, unless it is unable to provide the technology needed to process the transaction.<\/p>\n

What has been the impact of El Salvador’s decision?<\/strong><\/h5>\n

The adoption has led to turmoil in the\u00a0cryptocurrency\u00a0market and doesn\u2019t seem to have been well-received in El Salvador itself.<\/p>\n

–<\/strong> The value of bitcoin crashed<\/strong> by 19% on September 7, the first day of adoption. Chivo, the govt’s wallet for Bitcoin, was overwhelmed<\/strong> by users trying to register.<\/p>\n

– <\/strong>There have been riots and demonstrations<\/strong> against the new currency. Most citizens don\u2019t want to accept the crypto in normal transactions. They are understandably doubtful of holding an asset, which often swings 10% in value on an average day and 25-30% on \u201cswing sessions\u201d.<\/p>\n

– <\/strong>The spread on the interest<\/strong> El Salvador pays on its national debt over US treasury rates has widened<\/strong>.<\/p>\n

– <\/strong>Ratings agencies downgraded El Salvador<\/strong> once the bitcoin plan was announced in July.<\/p>\n

\"chart\"<\/p>\n

What are some issues with adopting Bitcoin?<\/strong><\/h5>\n

Bitcoin mining consumes more power<\/strong> than Belgium on a daily basis. So this is not environmentally friendly. That\u2019s one of the reasons China has offered for cracking down on\u00a0cryptocurrency.<\/p>\n

Another issue is that the money supply increases at a fixed rate, and every transaction recorded on the blockchain involves a unique bitcoin. This makes it hard to carry out normal lending operations<\/strong>. Fractional reserve banking is difficult, except by converting every transaction to a fiat currency before lending, and converting back when servicing the loan. This means accepting massive risks on the exchange rate.<\/p>\n

It can take a long time for any transaction to be registered and verified<\/strong> on the blockchain since this must be confirmed by multiple blockchain-watchers.<\/p>\n

One of the barriers to adoption is lack of understanding and another is lack of technology.\u00a0<\/strong>Also, transactions are hard without a smartphone which means a deep penetration of smartphones is needed to encourage widespread adoption.<\/p>\n

What are some positive implications?<\/strong><\/h5>\n

The world will get a sense of how crypto works as it\u2019s used in normal daily transactions in El Salvador. McDonald’s, local groceries, taxi services, etc., have started accepting bitcoin, and it\u2019s estimated that around 10 per cent of daily transactions by value are now being done in bitcoin.<\/p>\n

Source<\/strong>: This post is based on the article \u201cEl Salvador’s crypto foray offers a cautionary tale for other countries<\/strong>\u201d published in Business Standard<\/strong> on 29th Sep 2021<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Synopsis:\u00a0The tiny Central American nation of El Salvador has embarked on an interesting experiment by recognizing bitcoin\u00a0as legal tender. This is proving painful for many of its citizens, but it\u2019s a useful \u201cpilot\u201d project for larger economies that are contemplating about this new asset class. Introduction El Salvador has a population of 6.5 million and… Continue reading El Salvador’s crypto foray offers a cautionary tale for other countries<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[2498,4487,216,8716],"class_list":["post-138108","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-cryptocurrency","tag-el-salvador","tag-gs-paper-3","tag-money-and-banking","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704707072},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/138108","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=138108"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/138108\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=138108"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=138108"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=138108"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}