Why has El Salvador officially adopted bitcoin as its currency?

El Salvador has officially adopted bitcoin as legal tender. Draft legislation may soon lead Panama down the same path, while China, the united states and the united kingdom are investigating launching their own cryptocurrencies. Here’s what you ought to know.

Why are countries adopting bitcoin?

President Nayib Bukele hopes bitcoin will alleviate El Salvador’s prickliest financial problems: citizens sending money home from abroad account for up to fifth of the country’s GDP, but they need to pay high transaction costs, and 70 per cent of people have no bank account. Bitcoin permits quick, cheap payments across borders, and doesn’t require banks.

Every Salvadoran has been gifted $30 in bitcoin (the US dollar may be the nation’s other official currency) and will now shop or pay their taxes with it. Companies must accept it for legal reasons, but are permitted to instantly swap all bitcoin to dollars once received. A Panamanian congressman has proposed legislation that could start to see the country follow in El Salvador’s footsteps.

Does it work?

You will have hurdles, as bitcoin isn’t easy to use. Even though many in El Salvador were posting their successful bitcoin purchases on social media, others were marching in the pub in protest.

And the markets are spooked. The Financial Times reports that the yield on long-term Salvadoran bonds rose from 8.5 % in June just before the bitcoin announcement to 11 per cent, meaning confidence in the state’s finances has dropped,

Bitcoin itself is also volatile (the currency’s value has veered only £21,700 and as high as £46,500 this season), which isn’t an appealing property for legal tender. A company accepting bitcoin payments could find that the value of this currency has dropped when it’s time to get new stock.

Will a great many other countries follow suit?

In short, no. It’s extremely unlikely that any major economy would back a cryptocurrency like bitcoin, which can’t be manipulated by a central bank and was created by a secretive cryptographer.

But we will probably see central banks around the world launching their own digital currencies, combining benefits of cryptocurrencies and traditional money. Financial consulting firm PwC published a written report earlier this season on these so-called Central Bank Digital Currencies (CBDCs). The report claimed that 60 governments are currently focusing on one, and that 88 % are basing them on blockchains, the technology behind bitcoin, though not absolutely all CBDCs will be cryptocurrencies.

Have any countries started using CBDCs yet?

The Bahamas was among the first nations to issue a CBDC, launching a cryptocurrency version of the Bahamian dollar last year in order to avoid moving physical cash across its 700 small islands. Cambodia, too, launched a CBDC version of its currency called Bakong in 2020.

China has been trialing its e-CNY currency for quite a while and plans a large-scale test through the Winter Olympics next year. THE UNITED STATES has two programmes running to investigate a digital dollar, and the Bank of England is speaking with banks, retailers and members of the general public to decide what its own digital currency should appear to be.

How does a CDBC work?

Unlike a decentralised cryptocurrency, which is controlled by no organisation, a central bank would manage a CBDC. Nonetheless it could retain a number of the perceived benefits associated with a cryptocurrency, such as for example simple transfers of large sums, the opportunity to get rid of physical cash, and an audit trail to crack down on corruption and tax evasion. But while cryptocurrencies like bitcoin have hard-coded limits on the amount of coins which will ever exist, a CBDC could possibly be created from nothing by central banks with quantitative easing just as with traditional currencies – something bitcoin advocates say is a significant downside.