Finally, by the decision of the president of El Salvador, Bitcoin is going to be an alternative to the U.S. dollar for transactions in the country. El Salvador accepts Bitcoin for its domestic use.
Definitely, it’s a big coup for bitcoin, but not sure about the country. It’s a big opportunity for bitcoin to prove itself as useful as a real-world use case. But it’s unthinkable going beyond the U.S. dollar by bitcoin is possible.
Being an independent sovereign country with no own currency, El Salvador, which has now a dollarized economy, wants to adopt Bitcoin as its native currency. Having no own currency, EI Salvador doesn’t have the right to produce own currency, and so, either it needs to borrow or earn the dollar it needs. Remittances and exporting are the ways the country can earn dollar. If these sources stop working, the country relies on borrowing dollars from on international markets.
At present, the country’s remittances are fine, but exports are not, leading to less net inflows of dollar in its economy. The country’s debt has risen to over 90% of gross domestic product as the government is borrowing heavily. As the country needs dollar reserves to maintain liquidity for domestic banks, businesses and households, it can force to close all these if there is short of dollars. The country has been running short of dollar reserve since 2019. As BTC has some potential, EI Salvador can adopt it as their native currency as a second option and the idea is praiseworthy.
Where banking transactions are expensive, bitcoin transactions are cheaper and it’s really an advantage; for example, using bitcoins, overseas workers can send remittences in much cheaper and faster way than bank wire transfers. By a cryptocurrency exchange in the country, buying goods and services, and receiving payments from merchants will be a piece of cake. To secure exchanges against sudden lack of dollar liquidity, the government of El Salvador proposed to establish a trust fund. The country also wills to diversify the country’s dollar reserves into bitcoins and, once it is done, here will have investment opportunities for bitcoin investors. The government also proposed to use geothermal energy to power bitcoin mining as a scheme. There will be an increment in the reserves and GDP of the country, once all the schemes are in force.
Risks inherent to
Things that have enough potential are never out of risks. As BTC is notoriously volatile, market crash is a common affair inherent to it. And if such a crash makes space in here, it can lead the country’s banks to go belly-up. Along with that the country will run out of U.S. dollars. Businesses running on BTC and those who partly or wholly adopted BTC will lose everything at a crash.
As converting remittances income to BTC reduces dollar inflows, the country could still run short of U.S. dollars regardless of any major BTC crush. Selling bitcoin for U.S. dollars is not as easy as buying bitcoin with U.S. dollars. EI Salvador’s government should not spend large amount of new fiat currency in exchange for short-time improvement to economic growth. The country’s schemes are praiseworthy but not fully out of risks. It must invest its effort to mesmerize inward investment and develop export industries. Both the country and Bitcoin will be benefited providing that the scheme works.