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Financial Empowerment or Dangerous Gamble?

Martín Rodríguez Rodríguez reports on the promise and perils of El Salvador making Bitcoin legal tender Last month, El Salvador became the first country in the world to adopt Bitcoin (BTC) as legal tender, granting people the possibility of discharging debts and contractual obligations, such as paying taxes, in the cryptocurrency. The new law raises questions about the consequences for the stability of public finances, the integrity of the financial system, and outcomes for regular Salvadorians who have been unenthusiastic about the law. Such a significant policy change has sparked intense debate. Still, the policy has been discussed in binary terms as either an opportunity to empower citizens or a monumental blunder product of half-baked ideas of an increasingly authoritarian leader. In the commanding heights, the consensus seems to be that risks associated with the adoption of BTC as a legal tender outweigh its potential benefits. But despite many lingering questions, one thing is certain: El Salvador, a poor country more used to making headlines for the world’s highest homicide rate, is now commanding the headlines in the financial press. What comes next for the tiny Central American nation is now the business of the whole financial community, which will be watching developments closely. On the one hand, the custodians of the established order have indicated unreserved skepticism. For example, the World Bank outright refused to cooperate with the implementation of the law, while the International Monetary Fund warned the move was “a step too far.” Their reactions are unfortunate because in refusing to take a nuanced view of the policy choice made by a sovereign nation, they passed an opportunity to help shape and improve the regulations for a monetary revolution that is here to stay. On the other hand, those who believe that a new emerging monetary order based on information is in the offing celebrated the move, dubbing September 7 as B-day for Bitcoin Day.  In their telling, by taking BTC out of the shadows and putting it on a level playing field with the dollar, the official currency of El Salvador, the country is embracing the future and empowering its citizens to choose which money they want to use. This camp is convinced that a decade from now, the step will be regarded as a visionary, one that gave ordinary Salvadorian’s first-mover advantage into saving in “digital gold” and understanding the intricacies of digital money. Alex Gladstein, Human Rights Foundation Chief Strategy Officer, was more circumspect. In an interview last month, he told the Harbus that while he supports the policy because of its enormous potential to empower people and bring financial inclusion, the lack of transparency and authoritarian tendencies of the Nayib Bukele government should not be overlooked. Gladstein was particularly worried about the opacity in the state-run digital wallet, the “Chivo” app, and the possibility that it could become an instrument for financial surveillance in the future. Another point of contention amongst advocates is that article 7 of the law violates the core tenets of the Bitcoin ethos, namely freedom to choose. Currently, the law requires sellers of goods and services to accept BTC as payment for services forcing economic agents that might not want to use the currency to take it. This unnecessary move has only added to the confusion about the law, making the rollout more unpopular than it needed to be. However, one area where the law’s potential benefits seem undisputable is a means to receive remittances from abroad, which account for almost a quarter of the country’s GDP. Lowering transaction costs and making it easier for people to send and receive money without going through regular providers such as Western Union or MoneyGram could be as disruptive as the law itself but will depend on people trusting and understanding the processes to make it happen. Additionally, worries about illicit financial flows making their way to the country are not without merit. These could pose severe risks for the country’s financial sector and relations with correspondent banks in the US if appropriate anti-money laundering and policies are not in place. The prospect of El Salvador becoming a money-laundering hub could entirely derail the law and have severe unintended consequences for the country’s financial sector. Furthermore, the lack of transparency with which the government manages its exposure to bitcoin - having the president tweet about “buying the dip” is not transparent nor serious- could expose public coffers to exchange rate risk, seriously compromising the government’s ability to pay the bills. Without a central bank able to print notes and come to the rescue, given its dollarized status, the outcome could be catastrophic. All of that said, it is still too early to tell how the Salvadorian experiment of mainstreaming BTC will progress. I personally believe that in the long run, the promise is greater than the perils. If managed responsibly, market pressures will spur the development of the necessary infrastructure, attract investments, talent, and public education on BTC adoption, and  in doing so it will have succeeded in becoming the unlikeliest Commander of the global monetary revolution. If the country succeeds and becomes a test case for other nations, it will not be without irony that the beginning of the end of the era of currency monopoly in the state’s hands might have started in El Salvador, a country without currency.  

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