A Big Time Currency Experiment

Since Bitcoin’s inception in 2011, the cryptocurrency has appealed to the instincts of diverse groups. From libertarians who want to do away with the role of centralised entities (in the case of money, the central bank), to tech enthusiasts extremely bullish about the possibilities it presents, and speculators who would just like to toy with the volatility. And yes, Elon Musk is another interest group altogether. But the jury is still out on one question - can Bitcoin fundamentally function as a currency? While all its characteristics point in the direction of ‘no’, here’s El Salvador legitimising its usage as legal tender. 

A Dash of Daring

The IMF says that there are a whole lot of macroeconomic, legal and financial issues in which this move is embroiled. And that changes things, because the country is in talks with the IMF for a $1 billion program to meet its budget shortfall. Time and again, anti-bitcoiners have flagged the same old concerns about bitcoin as legal tender. It can’t function as a medium of exchange because hey, it’s not accepted everywhere. It can’t be a measure of value, because the price is such that it would be highly inconvenient to quote values like this - “Well, here’s a pencil and it costs 0.000002 Bitcoins”. On top of that, it won’t be possible to store value in bitcoin because of the sheer volatility. Call it a shock move or a bold one, El Salvador is daring to make it work. President Bukele announced that citizens can now pay taxes in Bitcoin. Even more, the country is going to grant citizenship to those in possession of at least three Bitcoins. Bukele also plans to put in place facilities for Bitcoin mining, which has recently come under the radar for its environmental impact. The idea is to use El Salvador’s “100% clean, emissions free energy from its volcanoes”. This whole plan looks like a breakthrough economic experiment and only time will tell whether it will be a trailblazer for more economies, or will end in disaster. But if you look closer, it only seems logical in a country which had to give up its own currency 20 years ago due to hyperinflation, a country where 70% of the population does not have a bank account.

Uncharted Waters

Bitcoin, besides mitigating those concerns, can be the force that brings economic freedom to this dollarized economy, largely affected by the US monetary policy. Of late, many economies, faced with hyperinflation or uncertainties, have seen their crypto markets thrive - what else do you turn to when your own currency practically becomes useless? There's the US dollar but adopting that means giving up monetary autonomy. Bitcoin's volatility is certainly a big impediment but it’s more like a Catch-22 situation - it won’t stabilize until everybody adopts it and nobody will adopt it until it stabilizes. Somebody at some point, has to try. Moreover, the government is also offering the citizens protection against the volatility - if a citizen doesn't want to hold the Bitcoin anymore, that's perfectly fine, s/he would be compensated in an equal amount of dollars. And to make sure the government has enough dollars to pay to these guys who are Bitcoin-averse, it's going to set up a $150-million trust. Okay, the President may be authoritarian in many respects and quirky in his choice of glasses, but he sure has a knack for technology - you've got to him credit for that. It would be interesting to see whether El Salvador's big move turns out to be a blip or a roaring success.