Bitcoin as legal tender in El Salvador

Here is FT coverage, I still feel I don’t know the whole story, but bitcoin will be legal tender and furthermore:

The government will set up a trust at the Development Bank of El Salvador to enable automatic conversion of bitcoin to dollars. The law will take effect 90 days after its publication in the official gazette.

“The entry of bitcoins will be equivalent to an increase in the country’s monetary supply, which will temporarily boost El Salvador’s economic activity, but will also pressure inflation higher and with that, interest rates will rise,” Gabriela Siller, head of economic analysis at Banco Base in Mexico, said in a note to clients.

Here are a few observations:

1. El Salvador already uses the U.S. dollar, so there is not much loss of monetary sovereignty here.

2. Maybe the easing into bitcoin is intended to lower the cost of sending remittances from the U.S., which are fundamental to the El Salvadoran economy?  According to the FT, remittances are about one-fifth of gdp, and transfer charges can be steep.

3. Is this all just?: “You don’t have to move to Puerto Rico to avoid capital gains tax, you can just invest in El Salvador!  We’re going to precommit to accepting your bitcoin so you will plan around that.”

3b. Isn’t it suspicious that their legislature approved the legal tender law by such an overwhelming margin?  Is it that they all have read and digested so many Medium crypto essays?  Or do they just see this as “a deal”?

4. I don’t see why this should increase price inflation in El Salvador.  Prices are denominated in dollars, and El Salvadorans, or for that matter visiting tourists, already had the option of converting their crypto into dollars before buying more pupusas.

5. Even in the United States the retail demand for bitcoin transactional use has been quite low.  Making merchants in El Salvador take bitcoin seems like a PR move to me.  What does it mean to make a low-tech merchant in the countryside “take bitcoin”?  How is he supposed to take it?  Do the abuelas in the market have to set up Coinbase accounts?

6. Could this be a transitional or bridge move to ease El Salvador away from the U.S. dollar and to replace it with a native currency?

7. Is the increasingly authoritarian government of El Salvador looking to PR moves to boost its international legitimacy?

8. Given all the surrounding publicity, it does seem that “they really mean it,” and the government will try to “get something” out of the initiative.

I will keep you posted as I learn more.  But as a general rule, if Central America is the laboratory for your ideas, beware before leaping to conclusions too quickly!  At the very least do go visit the country you are wondering about, and, in trying to understand the equilibrium, have the country more prominent in your mind than the innovation.

Comments

Respond

Add Comment