30 Bitcoin as Legal Tender: Will More Countries Follow El Salvador’s Lead?

In September 2021, El Salvador created history by becoming the first country in the world to make Bitcoin a legal currency. This was a historic decision because it enabled continued and the population to employ Bitcoin as one of the legal tenders alongside the U.S. dollar. It called for discussion that many other nations may decide the same given that conventional financial systems, particularly in the developing world, are under pressure. But how did El Salvador find itself to take this jump, and will other countries follow this line of action, too?

Thus, for those who follow the price and the state of the Bitcoin market, it is necessary to study this cryptocurrency as a legal tender. It stands as the first digital currency and is currently the largest where users can transact directly through the internet without the need for any middlemen because of the decentralized ledger known as the blockchain technology that governs the issuance of the currency whose total supply is limited to 21 million coins. It does not require the presence of a central banking system and hence makes it ideal for nations that are in search of simple approaches of discounting their currencies other than the traditional fiat currencies. Currently, Bitcoin is priced based on supply and demand in the market and becomes more fluid with the adoption of Bitcoin as legal tender in El Salvador.

El Salvador’s Experiment: A Bold Step

The main reason for El Salvador adopting Bitcoin as legal tender was the whim of its President Nayib Bukele, who stated that the country needs to satisfy the necessity of the unbanked population, approximately 69% of the country’s population. The adoption of bitcoins into daily utilization made money transfers and receive from those who previously were unable to access banking services, all through the use of electronic wallets and without the físical terminals.

Moreover, El Salvador’s economy is anchored on the remittances sent by the Salvadorians working overseas also triggered the decision. Hundreds of thousands of Salvadorans work in other countries and they remit billions of US dollars to their relatives back home annually and, in most cases, they do so at inflated cost due to high fees charged by money transfer companies. The use of Bitcoin, which can be processed at a meager fee in a short time across borders, was therefore viewed as an optimal solution that would enable the reduction of the costs mentioned above in remittances.

As much as the government has tried to remain optimistic, the transition has encountered some difficulties. Some of the challenges that have emerged include demonstrations, which have criticized Chivo—the government’s Bitcoin wallet—technical issues encountered with this wallet, and, lastly, a lack of trust due to the ignorance most people have on cryptocurrency. In addition, the IMF and World Bank fretted about Bitcoin’s price fluctuations and possible hazards associated with its use as a national currency.

Could Other Countries Follow Suit?

El Salvador’s adoption of Bitcoin as legal tender has raised an important question: Will other countries, especially those that currently face economic problems, do the same? As for now, it is uncertain, but there are a few elements that may decide if more countries will develop an interest in taking Bitcoin as their currency.

1. Economic Instability and Inflation: Instability in any economic system could be among the reasons. People living in a hyperinflation or devaluing economy may have faith in Bitcoin due to its stability, as compared to their national currency. For example, the rate of inflation in Venezuela or Zimbabwe recently has been extremely high making the fixed supply of Bitcoin attractive as people can use it to protect their wealth.

In line with this, Bitcoin’s decentralization and its deflationary characteristics may provide a solution to a number of nations that have been unable to support the viability of the respective national currencies. Moreover, if trust in the central bank is low in a given economy, Bitcoin’s use of public records based on blockchain technology may entice policymakers to seek an option.

2. Remittances and Financial Inclusion: Like in the case of El Salvador the majority of developing countries depend on foreign remittances from their citizens. The charges are usually awkward and can be burdensome, especially to people who are undertaking remittances to their home country. Sending Bitcoins across borders is cheap hence making it suitable for countries that rely on remittances.

Additionally, a problem still persists with regard to the level of financial inclusion especially in many developing countries where access to banking services is still restricted. These nations could offer the underbanked financial inclusion through Bitcoin, mobile money, and digital wallets when they adopt Digital Currency. Developing countries that own many Smartphones but few banking facilities like Kenya or Nigeria can adopt Bitcoin within their economy.

3. Political and Regulatory Hurdles: As can be seen, there are various benefits of using Bitcoin as a legal tender nonetheless the political and legal consideration raises a lot of questions. Currently, many governments and central banks still have concerns regarding cryptocurrencies based on factors such as price fluctuation and criminal activities as well as cyclic effects on monetary policy.

For instance, last year, both the IMF and the World Bank expressed their worry about the possibility of Bitcoin being made as a legal tender because of the risks that it may bring to the stability of the financial system. The issue that has worried most governments that are in the process of adopting Bitcoin is its price fluctuations. Huge price fluctuations, in the extreme case of an even worse value slump of Bitcoin, could pose a threat to the stability of an entire country since many transactions and reserves may be in Bitcoin.

The Stop-Go Style – A Gradual Shift or a One-Off?

Although this is a break to the world’s economics, few nations will follow the example of El Salvador of making Bitcoin a legal tender within the shortest period possible. The difficulties and risks associated with it, especially with references to the price risks and the inability to predict the regulations, make it a very unfeasible proposition for most countries.

However, there could be a change in trend as seen in the Governments of some regions and countries, with the use of Bitcoin and other cryptocurrencies in daily transactions gradually becoming popular. Such nations could begin to experiment with the adoption of digital currency as part of their broader financial system, even absent digital currency as official tender. 

Furthermore, the emergence of the Central Bank Digital Currencies (CBDCs) may also contribute to the formation of an approach for the countries embracing cryptocurrencies. They are more stable than other digital coins such as Bitcoins that are volatile in nature and could be appealing to the government.

Final Thoughts

One cannot overemphasize the historical importance of El Salvador embracing Bitcoin as a legal tender. It has provided the basis for considering how Bitcoin might be included; however, the way forward is not well charted.