The adoption of Bitcoin as an official currency in El Salvador.. What does it mean for cryptocurrencies?

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date of publication:
Jun 11, 2021 8:14 GMT

Update date: Jun 11, 2021 8:20 GMT

El Salvador has become the first country in the world to adopt Bitcoin as an official currency in the Central American country, as President Neb Bukele is touting its use for its ability to help his countrymen residing abroad to bring remittances back to their home country.

On Wednesday, lawmakers passed a law that would allow the volatile digital currency to be used in many aspects of everyday life, from buying real estate to paying taxes.

This is what it means to switch to Bitcoin as an official exchange currency – and emerging markets similar to El Salvador.

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In a report in its English language version, “Reuters” agency asked a number of questions and answers that clarify everything that comes to mind about the step taken by El Salvador, and its impact on cryptocurrencies.

What is the opinion of the law?

Regulations in El Salvador mean that Bitcoin may be par with the US dollar. Declaring Bitcoin an official currency means that stores and companies must use it for various transactions.

And it doesn’t just stop there, but taxes will also be paid with Bitcoin, although its use may be optional.

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El Salvador is located in Central America, and relies mainly on the US dollar as the country’s official currency, and also maintains its reserves of gold and foreign exchange with the US Federal Reserve, while the country’s gross domestic product amounted to about $ 54 billion in 2018, which is ranked 101 in the world, according to data from the IMF. International Monetary.

Will Bitcoin be used like the dollar?

The value of Bitcoin fluctuates wildly during its life of just 12 years, with hits it takes every now and then, making it impractical to trade.

Bitcoin is not used much to procure goods and pay suppliers from around the world, regardless of the growing variety of major companies accepting it as a fee.

El Salvador said the bitcoin and dollar trading fees may be set by the markets. But no element is provided about how this works sequentially and whether or not distributors and companies will replicate prices in real time or perhaps through different mechanisms.

The federal government guarantees convertibility into US dollars at the time of the transaction with a $150 million belief created on the financial institution that improves state performance.

Is Bitcoin a real currency now?

Bitcoin is designed as an exchange rate, but many buyers see it as an asset that is closer to gold than an alternative to the dollar, the euro, or the Japanese yen. Monetary regulators and enforcement agencies around the world often debate the place of cryptocurrencies and the way in which they should be regulated.

Is it the start of a broader trend?

In theory, Bitcoin offers a quick and low-cost solution to shipping cash across borders without relying on traditional cash companies similar to banks and remittance companies.

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Proponents of the cryptocurrency say it could spread in emerging markets in a big way, where individuals lack access to traditional cash providers and must pay exorbitant fees to send and receive money.

But changing Bitcoin to and from the original currencies in such economies tends to rely on informal brokers, requires technical knowledge, and is fraught with the risk of fraud and value fluctuations.

Analysts say it is too early to say whether or not El Salvador’s transition will begin a broader development of Bitcoin adoption.

How will you play in emerging markets?

The El Salvador experience will provide the primary alternative for analysts to gauge the impact of cryptocurrency on the financial system.

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But some warn that the increased use of cryptocurrencies will reduce the effectiveness of the financial cover.

While El Salvador already uses the dollar as its official currency, it is likely that various emerging economies that are on the cusp of dollarization will discover that the use of cryptocurrency can amplify this, reducing the flexibility of central banks to act as lenders of last resort.





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