Throughout financial history, what has been accepted as currency is a far more plastic concept than people living in that age often given it credit for.
At its core, currency is a medium of exchange, a unit of account and a store of value, but what has come to define human economic life is often in a state of flux and debate and what is “value” is often dependent on who’s doing the asking.
Take the ancient Inca for instance, for whom gold was the sweat of the sun, and silver, tears from the moon.
So imagine the Inca’s bewilderment when the Spanish Conquistadors fought each other and the Incas for the latter’s considerable gold reserves.
While the Inca appreciated gold for its aesthetic beauty, the sheer abundance of the metal made it far from suitable as a medium of exchange.
Instead, the Inca used units of labour as a form of currency, while the Spanish carted as much gold as they could from the Incans to fund their wars of conquest back home in Europe, where gold was scarce.
But currency can be literally anything, from seashells at Club Med, to promissory notes in Hong Kong, what matters is not what someone says it is, but what someone else will give you in exchange for it.
Bitcoin Shall Become a Legal Tender in El Salvador
And so when El Salvador declared that Bitcoin would be accepted as legal tender, legions of cryptocurrency advocates were hopeful that the move would mark a watershed moment in the evolution of decentralized currency.
Reality unfortunately intervened.
With just 37.1 per cent of El Salvadorans owning a smartphone and with barely a third of the country having access to the Internet anyway, there could not have been a more ill-prepared country to roll out what was meant to be the currency of the future.
And while Bitcoin doesn’t technically require a smartphone or even an internet connection to transact with, it certainly helps, especially if the goal is to use the cryptocurrency as national legal tender.
Predictably, when El Salvador’s government attempted to roll out Bitcoin as legal tender last week, the government-released app called Chivo, that was already pre-deposited with some US$30 worth of Bitcoin, crashed.
In a country where paved roads are scarce, paving rails for Bitcoin is akin to trying to launch rockets into space from your backyard with some toilet rolls and sticky tape.
As September 7th came and went, El Salvadorans woke up to a country where both the dollar and Bitcoin became legal tender and the results were as unimpressive as you might have imagined.
Barely a week before the big day for Bitcoin, El Salvadorans who had put in place measures to accept Bitcoin were the exception and not the norm.
In July, an overwhelming three-quarters of El Salvadorans surveyed by polling firm Disruptiva said they were sceptical of the plan to adopt Bitcoin and a whopping two-thirds were not willing to be paid in the cryptocurrency.
And as recently as July, almost half of all El Salvadorans didn’t even know what Bitcoin was.
Messing with the Legal Tender
Whilst the experience in El Salvador’s rollout of Bitcoin was not great, the implementation or withdrawal of forms of legal tender has tended to be messy.
Take for instance the Indian government’s abortive attempt several years ago to ban the ₹500 and ₹1,000 notes, which New Delhi almost immediately backtracked on in the ensuing chaos.
And even in the developed Eurozone, the rollout of the euro as legal tender wasn’t without hiccups, let alone attempting the same feat with a digital currency in an impoverished Central American country.
Legal tender is typically defined as the money that courts of law must accept to settle debts, but El Salvador’s initiative for Bitcoin goes even further, mandating that businesses must also accept the cryptocurrency as lawful payment for goods and services.
A cynical view is that the only reason El Salvador adopted Bitcoin as legal tender was because President Nayib Bukele’s two brothers Ibrajim and Yusef are big cryptocurrency enthusiasts.
But Bukele believes that adopting Bitcoin will help reduce the cost of remittances and help attract foreign investment, a view that is not entirely without merit.
Bitcoin Will Soon Become A Popular Mode of Remittance
According to data from the World Bank, almost a quarter of El Salvador’s GDP depends on remittances, a figure that has only grown over the past decade, as economic circumstances in the country have gotten more dire.
And with remittance fees accounting for as much as 14 per cent of transaction cost in some cases, any reduction in friction for cross border value transfers could have a significant impact on El Salvador’s economy.
Bukele’s gambit might lure in deep-pocketed investors who, given the increasing scrutiny on digital assets, may want to seek sanctuary in a country that would provide them the anonymity inherent in cryptocurrencies.
As cryptocurrencies have gained in prominence and adoption, regulators globally have been tightening the noose around stakeholders, with more aggressive threats of enforcement and tighter regulation.
Even industry stakeholders who have strived to appear compliant have not been spared, with the latest target for authorities U.S.-listed cryptocurrency exchange Coinbase Global.
The U.S. Securities and Exchange Commission recently threatened to commence a lawsuit against Coinbase Global if the latter rolled out its savings product that appeared to act as an investment contract.
By paying interest on cryptocurrency deposits the SEC argues, Coinbase Global is actually entering into an investment contract with depositors, although truth be told, the product looks more like a savings deposit and a job for the Office of the Comptroller of the Currency.
And in the past few months, regulators from Malaysia to Japan, Singapore to the United Kingdom, have all targeted the world’s largest cryptocurrency exchange by traded volume Binance, often going after the fiat on and off ramps for cryptocurrencies as a means to censure cryptocurrency companies.
All of which comes at a time when institutional participation is increasing and the number of investors seriously considering cryptocurrencies as a nascent asset class is growing.
Which is why cryptocurrency whales whose proceeds are from more sketchy sources may find safe harbour in El Salvador.
Next Steps for El Salvador
Yet despite the botched Bitcoin roll out, what happens next in El Salvador is probably more important than what occurred on September 7th, which is pretty much nothing.
Despite all the hype, Bitcoin’s adoption as legal tender in El Salvador deflated most expectations that the deflationary currency would spark a revolution in the global monetary system.
With some 2 million El Salvadorans spread across the world and sending home almost a quarter of that country’s GDP, it will be interesting to see if they soon adopt the low cost transfers promised by Bitcoin, or stick to legacy rails using banks and wire services, which are slow and expensive.
More importantly, Bitcoin, which is often touted as being a tool to assist the unbanked, will reveal whether it can live up to the hype.
Many El Salvadorans understandably fear Bitcoin’s infamous volatility and the precipitous fall in Bitcoin’s price in the wake of the messy roll out in their country did not inspire confidence in the fledgling legal tender.
So far, those accepting Bitcoin in El Salvador do not quote prices for goods or services in it, but convert from dollars at the point of sale.
To be sure, the world still prices everything in dollars, from the sweat of the sun to the tears of the moon, there isn’t a key commodity in the world that isn’t quoted in the greenback, so measuring Bitcoin against a truly spendable currency, the dollar, isn’t altogether unusual.
And while there are an estimated 200 Bitcoin cash machines being installed across El Salvador to enable dollars to be converted into Bitcoin in digital wallets, fees can be as high as 5 per cent for the conversion.
But perhaps where the greatest experiment will occur will be how El Salvadorans ultimately treat Bitcoin, whether as a spendable currency, or something that can form the basis for speculation or investment, or even both.
If Bitcoin is to become the spendable currency that its eponymous creator Satoshi Nakamoto had intended, then El Salvador is without some irony, the ideal testing ground.
The coming weeks, months and years will see if Bitcoin lives up to the lofty expectations that its creator and its advocates have for it.
In all likelihood however, being a deflationary currency, Bitcoin will be held, rather than spent, and the dollar will continue to serve as the more practically traded legal tender of El Salvador.
What’s more significant is that after over a decade since the Bitcoin whitepaper, what was hitherto considered inconceivable, has now become reality — an actual country has declared that Bitcoin is legal tender.
Words, matter, and just as they can change the world around us, they can change what counts as money too, one Satoshi at a time.
By Patrick Tan, CEO & General Counsel of Novum Alpha
Novum Alpha is the quantitative digital asset trading arm of the Novum Group, a vertically integrated group of blockchain development and digital asset companies. For more information about Novum Alpha and its products, please go to https://novumalpha.com/ or email: [email protected]
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