Bitcoin as Legal Tender: El Salvador’s Risky Financial Maneuver Struggles to Pay Off

Bitcoin as Legal Tender: El Salvador’s Risky Financial Maneuver Struggles to Pay Off

In a radical move, El Salvador’s President Nayib Bukele submitted a bill to the El Salvadorian Congress in mid-June 2021 proposing to make Bitcoin a legal tender. It was a controversial move, as no other country had adopted Bitcoin as legal tender before.

The decision was deemed risky given Bitcoin’s volatile price, the cryptocurrency’s lack of physical infrastructure in El Salvador, and no real precedent for how to implement this sort of idea.

Despite concerns from detractors, the bill passed unanimously in mid-June 2021. With this new declaration, El Salvador became the first country to legally recognize Bitcoin as a full legal tender.

So far, the currency has been met with success, with citizens quickly beginning to adopt it as a main form of payment. In one instance, a real estate company in El Salvador accepted Bitcoin as payment in exchange for a luxury property.

But El Salvador’s move has come with numerous issues, especially those that involve the risk of volatility. As Bitcoin’s prices go up and down, so too do its effects on the economy and businesses that have made purchases with it. For example, a business that accepts Bitcoin as payment could be hit if the prices take a dip.

In order to protect businesses and citizens from the volatility of Bitcoin, President Bukele proposed a plan in mid-July 2021 to have the El Salvador central bank back the worth of every Bitcoin purchased in US dollars. This would help ensure that, in the face of Bitcoin’s volatility, a vendor or citizen who accepts Bitcoin as payment can be assured that its value is equivalent to the US dollar.

The move will have long-term effects. If Bitcoin is adopted as a legal tender in El Salvador, it could drastically reshape our views about cryptocurrency, banking and global economies. It could help create an entirely new system for conducting global transactions that is more secure, efficient and cost-effective.

In the end, the move is a gamble that could pay off if utilized properly. As developing nations look for new ways to facilitate their economies, El Salvador’s foray into Bitcoin could be a lesson in the risks and rewards that come with being a trailblazer.