Griffin on Tech: All eyes on El Salvador's big bitcoin bet
If you were scrolling through Twitter one day and saw Prime Minister Jacinda Ardern advising followers to buy bitcoin, you'd probably think her account had been hijacked.
But that's exactly what El Salvador citizens watched their president Nayib Bukele do this week as the Evergrande property crisis in China pushed the price of equities and cryptocurrencies down across the board. Why would the president be crowing about using public funds to buy up 150 bitcoins, worth around US$6.4 million?
That's because El Salvador earlier this month became the first country in the world to adopt bitcoin as legal tender alongside the US dollar. The Central American nation has gone all-in on a cryptocurrency as a means of exchange and store of wealth in the country. The 40-year-old politician has been the driving force behind the move, which central bankers and financial analysts around the world are watching with intense interest to see if it could pave the way for other small nations to follow suit.
Bitcoin, the world's most popular cryptocurrency, is a store of value and can be converted to and from fiat currencies all over the world. But it isn't tied to any underlying assets, it doesn't have intrinsic value. It is worth only what people think it is worth and its price per coin fluctuated around the US$43,000 mark today. Five years ago you could buy a bitcoin for US$700. Some see bitcoin, with its total eventual supply limited to 21 million coins, as likely to appreciate even further over time as adoption increases.
It seems like an incredibly risky move to urge your countrymen and women to adopt a cryptocurrency that wasn't created by your own government and isn't controlled by it. But within a week of the country adopting bitcoin, 1.7 million El Salvarodians of a population of 6.5 million had activated Chivo, the new national digital wallet that citizens can use to store their bitcoin. It helped that each citizen receives US$30 as a sign-up bonus.
Citizens can pay their taxes and buy land using bitcoin. Bitcoin ATMs have appeared all over the country to swap cash for digital coins.
The cost of sending cash
El Salvador's lawmakers passed legislation clearing the way for Bitcoin's elevated status in the country. But there was no national referendum on it, which has angered many - the launch of Bitcoin was accompanied by riots in parts of the country.
But El Salvador has some valid reasons for putting its fate in the bitcoin system that other countries, including some of our Pacific Island neighbours, can relate to. El Salvador has a massive unbanked population, with 70% of citizens bartering and trading in cash, without using a bank account. The nation is also hugely reliant on remittances - family members outside the country, mainly in the US, sending dollars home. By some estimates, this accounts for up to 20% (US$6 billion) of El Salvador's gross domestic product (GDP). But remittances, these cash transfers, attract big fees and can take days to process.
Bukele is hoping that Chivo wallet users will be able to receive and send bitcoin to wallet users outside the country at greatly reduced cost. the system allows people to receive payment from Bitcoin holders in US dollars if they prefer. The Bitcoin network has its own transfer fees, but they are likely to be much lower overall. Bukele also sees bitcoin as a means of channelling foreign investment into El Salvador. Bitcoin holdings will be exempt from capital gains tax and foreigners who invest three bitcoins in the country, around US$126,000, can qualify for residency.
With bitcoin's market cap hovering around the US$800 billion mark, there's ample scope for El Salvador to attract digital entrepreneurs drawn to what could emerge as the world's first crypto-run economy. Many of them are already camped out at 'Bitcoin Beach', attracted by the president's crypto-friendly approach. There are pros and cons to El Salvador's move which Fortune outlines here.
It certainly could all go pear-shaped. Most countries are in the process of cracking down on cryptocurrencies, concerned about the extent of the informal economy they facilitate and their potential for use in money laundering and funding serious crime. There's no guarantee that bitcoin will be king of the coins in a decade's time, potentially leaving a generation of El Salvadorians with near-worthless tokens. The International Monetary Fund advised El Salvador against its bitcoin move, pointing out that it will complicate efforts to reduce the country's significant debt levels. Imagine if Chivo is hacked and bitcoins are stolen. Will the government step in to cover the losses?
Coining an idea
On the other hand, the capitalist system hasn't been good to countries like El Salvador anyway. Other Latin American countries, such as Cuba and Panama are in the process of introducing legislation to speed the adoption of cryptocurrencies. Ukraine is doing likewise. Developing countries that, in many cases, have adopted the US dollars and American monetary policy for some sort of stability in their local economy, now see cryptocurrencies as giving them a chance at achieving financial autonomy.
Our own efforts have been much more conservative, with the Finance and Expenditure Select Committee having only just kicked off an inquiry into cryptocurrencies back in July. The stability and trust in our financial system have served us well, despite the power and influence of the Australian banks. So a cautious approach makes sense.
But for Bukele, the self-described "coolest dictator in the world", there's much less to lose and a lot to gain by embracing the crypto movement. This feels like a watershed moment for this disruptive technology even if the market volatility associated with cryptocurrencies is unlikely to disappear any time soon.
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