Over the past few weeks, a significant number of countries have become crypto-friendly. More so, in Latin America and Africa than in the western world. The whole macro-economic environment of these countries has so far been dependent on oil or on loans provided by the International Monetary Fund, or international aid. Most of such international aid and/or loans come with riders that provide access to the nations natural or human resources or affect soverignity in some way.
El Salvador, a small country with a 6.5 million population, recently became the first country to make Bitcoin legal tender. This has been claimed and cited by certain Bitcoiners as a watershed movement where Bitcoin moved from a fringe asset used to hold assets – to the mainstream. The case of El Salvador is unique, because of two factors – the country has been ravaged by decades of civil war(s) and mutinies against the rulers. While the rest of the world embraced globalization So much of economic damage has happened in that country that they do not even possess mints to print sovereign currency. That country had the US Dollar as their only national currency till this point. This meant that the Federal Bank in the United States controlled all the money supply within El Salvador. Governments control societies, through the control of money supply…and being dependent on a foreign country for monetary policy (supply) meant the country was not entirely Free.
Now with Bitcoin, being the second only legal tender after the US Dollar, El Salvador has taken a path that is unique. One thing is for sure – El Salvador cannot print their problems away – like is done in so many countries with a flexible monetary policy, wherein governments can choose to print and circulate money to prevent short-term credit crunches, business loss, etc. Below I highlight a few challenges that can accompany adoption at the socio-economic level within El Salvadore. I also highlight the benefits that can accompany adoption of Bitcoin as a legal tender.
A few challenges that can accompany such adoption are as follows:
1. Political and Lending Challenges:The macro-economic resistance from international lenders.
2. Adoption Challenges:The resistance from within the country where users who are unbanked find it difficult to adopt the technology either via smartphone-based wallets or through desktop-based wallets.
3. Legacy Challenges: The difficulties to migrate legacy infrastructure to be able to access and use cryptocurrencies for common usage.
4. Printing away Problems: The inability to print away money during times where regular business (and commerce) is affected, will cause significant and rampant inflationary situations for prices of common commodities unless governments enact price control and anti-hoarding measures.
5. Managing Volatility : international commerce and banking systems will have to leverage against Bitcoin price fluctuation when Bitcoin demand falls and increases in global markets (or when coordinated mainstream media attacks) happen for bitcoin driving down prices.
6. Money Laundering protections, anti-scamming protections and emphasis on cybersecurity : It is important to note that El Salvadore should lead the world in what can become a successful model for other non-pariah states and nations to adopt, when their own financial systems and monetary systems have been decimated by global markets. For this to happen, user(s) from El Salvadore should be protected from or should be answerable to money laundering laws and stringent cybersecurity norms that prevent both the misuse of cryptocurrencies, and, of resources that are used to hold, store and transact with cryptocurrencies. The cryptoworld is full of scams of all kinds from fake ICO’s to money skimming schemes, to every possible illegal activity under anonymity. strong regulation that can penalize both perpetrators and protect those who have been affected, is the need for the hour.
These macro-economic and legal challenges should be handled by policymakers, with significant experience and expertise in a timely fashion -using rigorous economic and policy-based modeling. If there is a lack in rigor and/or policy awareness, and there is a delay in implementing/modifying legal clauses to suite the new conditions that persist, then cryptocurrency adoption would cause more troubles than otherwise.
That being said there are significant advantages to adopt Bitcoin as a legal tender.
1. De-clutching from another country’s monetary system – in this case, US federal reserve’s monetary policy, sort of giving the country incentives to use their own bitcoin.
2. Increase in Networth for the country. If Bitcoin’s price grows as has done over the past 10 years, El Salvadorians could see a sudden increase in their networth, and as a nation could progress toward increasing GDP, GNP and average networth of each citizen.
3. Forcing infrastructure growth, network connectivity, and the digital economy. Now, all businesses however remote they are – will be forced to be connected to the internet. India accomplished a lot with its Railway system wherein the country grew its road network, electric connectivity, water supply, bridge construction, and such throughout the length and breadth of a vast country on the backbone of its Railways. In addition, the railways employ more than 3 million people and is one of the largest service providers for the logistics and supply chain in India. This is not to mention e-commerce, payment gateway advancements, prevention of fraud, etc. in the Railways. El Salvador’s bitcoin adoption will do the same – on the digital infrastructure side. internet companies, service providers, electricity providers, and allied service providers will be forced to connect the remotest corners of El-Salvadore, creating huge amounts of demand and supply for these services. Overall, in the next few years with this economic model we might see the whole of the country become internet-enabled, with every citizen understanding and creating unique applications for their own use.
4. Human Capital and Knowledge Work increase. The Bitcoin beach movement created to accomplish the true potential of Bitcoin – enables citizens of El-Salvadore to leapfrog into the networking, telecommunication, and fintech revolution. Already large mines powered by entirely green sources such as “Volcano” are being created in ElSalvadore. With China pulling the rug on all activities crypto -i.e., development, mining, exchanges, and transactions legally, a section of the miner(s), and their equipment will move to El Salvadore, creating not only an environment where Bitcoin is used for active commerce, but also for mining… The next generation of el Salvadorians (after the millennial generation i.e., the gen Z) will grow up knowing technology, using Fintech apps, fintech blockchains, writing code and programming money, to create an entirely sustainable ecosystem that is supported by open-source programming and knowledge.
It is the moment of reckoning for Bitcoin, the lightning network, and all other cryptocurrencies. If Bitcoin adoption becomes successful, the next natural steps for El Salvadore would be to let in stable-coins and technologies such as Ethereum, etc.That being said, if this decision to co-opt Bitcoin with the US dollar were to become successful, ElSalvadore -will leapfrog quickly into the first world, similar to what Singapore did during the period 1950-1980.