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Will Bitcoin bring prosperity to El Salvador?

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El Salvador makes history on Tuesday when it becomes the first country in the world to adopt Bitcoin as official legal tender, parallel to the U.S. dollar, and other nations will soon follow suit, according to the CEO of leading financial advisory and fintech deVere Group.

“El Salvador is making history with a bold jump into the future of money – which is, inevitably, digital – by officially recognising Bitcoin as legal tender together with the U.S. dollar, said Nigel Green, chief executive and founder of deVere Group.

Currently, outside of the U.S. and its territories, there are seven other sovereign nations that use the U.S. dollar as their national currency.

Other countries, in particular other Central and South American nations, will be watching with great interest to see if the experiment works to shore up El Salvador’s shaky economy, explained Green.

“There’s no doubt that there are major risks attached to the decision made by the young maverick president, Nayib Bukele,” he added.

“These include the possibility that El Salvador could run out of dollars and that institutions, such as the IMF, might not look favourably on a nation that has adopted Bitcoin.”

Green said the risks prompted some El Salvadorans last week to take to the streets to protest against the adoption of Bitcoin as an official currency.

“However, I’m giving El Salvador’s Bitcoin move a cautiously optimistic welcome for five key reasons

“First, El Salvador chose to be reliant upon a major ‘first-world’ currency, the U.S. dollar, to complete transactions. But this reliance on another country’s currency also comes with its own set of, often very costly, problems.”

Green said that the El Salvadoran government cannot print its own money and the economy cannot benefit from the U.S. Federal Reserve’s money-printing agenda. Therefore, El Salvador must either borrow or earn the dollars it needs.

 

Crippling impact of stronger dollar

“A stronger U.S. dollar can have a crippling impact on emerging-market economies, such as that of El Salvador. By adopting a cryptocurrency as legal tender, these countries then immediately have a currency that isn’t influenced by market conditions within their own economy, nor directly from just one other country’s economy.

“Bitcoin operates on a global scale and is, as such, largely impacted by wider, global economic changes.

“Second, central banks around the world have been devaluing their currencies, while Bitcoin’s supply is not only limited, but also new coins are mined at a decreasing rate too. El Salvadorans could, therefore, find their new adopted currency gives them more purchasing power when they buy from overseas.”

The deVere CEO added that the third reason was that El Salvador’s adoption of Bitcoin could cut the cost of remittances, a major source of income for millions of people. The remittances would be made faster and easier too, compared to money transfer services or bank wires, so remittances are likely to further increase.

“Fourth, by diversifying the nation’s dollar reserves into the cryptocurrency, there could be additional opportunities to earn yield, meaning the size of the reserves would grow.

“And fifth, El Salvador could benefit from significant foreign investment and capital inflows as digital asset organisations are likely to relocate to the Bitcoin-friendly nation.”

Green said that if the adoption proves a success it will be a massive step for Bitcoin’s mass adoption as other countries will follow El Salvador’s lead.

“Due to their similar reliance on remittances, amongst other factors, other nations, including Panama, Guatemala and Honduras, could also adopt Bitcoin should the process in El Salvador run smoothly and there’s greater economic growth, stability, and levels of financial inclusion as a result.”

The deVere CEO concluded that he was “giving a measured welcome to the move that could make a hugely positive impact on this central American nation and its population.

“This is truly a landmark moment in the evolution of digital currency.”