On September 7, El Salvador became the first country in the world to accept Bitcoin as legal tender.
This is a milestone for cryptocurrencies around the world, but there is a problem.
Just barely a day after the bold and ballistic move, angry protests, technological glitches and a plummet in value marked the first day of El Salvador adopting Bitcoin as legal tender.
El Salvador President Nayib Bukele confirmed that the Chivo Wallet had been taken offline following complaints about installation problems. No time has been given for when it will be online again.
Chivo is a government-backed digital wallet.
Even the Chivo Wallet’s website was taken down on the very day the cryptocurrency took effect as a legal tender.
Citizens have protested against it, complaining that there has been too little explanation from officials about what benefit Bitcoin will bring and how transactions using the cryptocurrency will work.
The price of Bitcoin on the very day crashed to its lowest in nearly a month, falling from Ksh. 5,725,180.79 (US$52,000) to under Ksh.4,624,338.43 (US$43,000) at one point.
According to the BBC, an opposition politician said the fall caused one of Latin America’s poorest countries to lose $3m.
The rollout of bitcoin in El Salvador was far from what President Bukele would have envisaged when he began his bold experiment.
Nonetheless, the government has even given Salvadorans Ksh.3,302.96 each of Bitcoin to encourage its adoption. It says bitcoin could save the country $400m a year in transaction fees on funds sent from abroad.
The country approved a law to classify Bitcoin as legal tender in the Latin American country on June 9 this year.
But on June 11 the International Monetary Fund (IMF) said it had economic and legal concerns regarding the move by El Salvador to make bitcoin a parallel legal tender, further clouding the outlook for an IMF-backed program and widening spreads on the country’s bonds.
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“Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis,” said Gerry Rice, an IMF spokesman.
El Salvador’s own currency, the Salvadoran colon, was replaced by the US dollar in 2001.
The country depends heavily on money which citizens based abroad, often in the US, send home and these remittances to El Salvador were worth almost $6bn in 2019, amounting to 16 percent of El Salvador’s gross domestic product.
The country moved to using the US dollar as legal tender as a result of these remittances, and the move to Bitcoin is based on an expectation that more Salvadorans will begin sending money home using the cryptocurrency – and the Chivo Wallet is intended to be available to citizens who are residing abroad.
On June 23 this year, the Bank for International Settlements gave its full backing to the development of central bank digital currencies (CBDCs), a move to ensure ‘Big Tech’ does not take control of money.
“ Central bank digital currencies (CBDCs) offer in digital form the unique advantages of central bank money: settlement finality, liquidity and integrity. They are an advanced representation of money for the digital economy,” said BIS on its website.
Demands on retail payments are changing, with fewer cash transactions and a shift towards digital payments, in particular since the start of the COVID-19 pandemic.
According to BIS, the ultimate benefits of adopting a new payment technology will depend on the competitive structure of the underlying payment system and data governance arrangements.
The push comes as physical cash use falls globally and authorities look to fend off the threat to their money-printing powers from bitcoin and efforts from ‘Big Tech’ such as the Facebook-backed Diem, formerly Libra.
The BIS acknowledged that the technology could encourage either a virtuous circle of equal access, greater competition and innovation, or it could foment a vicious circle of entrenched market power and data concentration.
According to the Wallstreet Journal ,cryptocurrencies such as bitcoin have foreshadowed a potential digital future for money, though they exist outside the traditional global financial system and aren’t legal tender like cash issued by governments.
China’s version of a digital currency is controlled by its central bank, which will issue the new electronic money. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate one of bitcoin’s major draws: anonymity for the user.