Last week, El Salvador became the first country in the world to accept bitcoin as legal tender. However, a decision from the World Bank has thrown a complication into this situation. The central banking agency has noted that El Salvador is alone in this attempt and that the World Bank will be unable to help them implement this change. The World Bank cited two of the major criticisms of cryptocurrency as their reason for refusing to help the Central American country.
“While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” a World Bank spokesperson told Reuters in an email response. With Wednesday’s World Bank decision, El Salvador’s president, Nayib Bukele, is on his own if he wants to promote bitcoin as the de facto monetary system in the country.
Last week, El Salvador’s legislature voted to formally recognize bitcoin as legal tender, alongside their other official currency, the US dollar. The move is intended to make it easier for El Salvadorans living in other countries to send money home to their families. According to the BBC, around one-fifth of El Salvador’s GDP, roughly $4 billion per year, is generated by remittances, or money sent home by El Salvadorans living abroad.
The new law drew celebration from crypto enthusiasts. Many enthusiasts on social media pointed to the country’s adoption of the currency as legal tender as a major step toward legitimizing the standard. Others have questioned the change, noting that bitcoin is, by definition, decentralized. The country will have no control over its supply or its value. It’s possible the country is more tolerant of this lack of control due to their legal tender for the past 20 years being another standard they have no control over, the US dollar.
The country’s government is pushing to have the digital currency widely accepted as a currency for transactions within the country in the next three months. However, without World Bank assistance, this will be a difficult deadline to achieve. The Central American country’s local economy still relies on face-to-face commerce, and few people in the country are currently equipped to use crypto wallets or exchanges for their daily purchases.
El Salvador Regroups
While the push to make bitcoin legal tender drew celebration from crypto enthusiasts, it’s sparked some concern from banking institutions, with Amherst Pierpont Securities strategist Siobhan Morden noting “The recognition of a ‘Bukele’ risk premium has probably done some permanent damage to investor sentiment.”
Part of the reason major financial institutions are cautious about the switch to crypto is that Bukele recently pulled El Salvador out of the Organization of American States’ anticorruption agreement. This move drew scrutiny from the US, which has been pushing anti-corruption measures as part of its broader Central American immigration policy.
The World Bank decision doesn’t mean that the country can’t implement bitcoin as a legal currency, though. There are still talks ongoing between El Salvador and the International Monetary Fund, which could buoy Bitcoin’s position in the country’s economy. El Salvador’s Finance Minister, Alejandro Zelaya, characterized the IMF as being “not against” the idea of the country using bitcoin as legal tender.
For its own part, the IMF is cautious on the idea, with a spokesperson saying “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis.”
Is This Bad for Bitcoin?
The World Bank’s decision to not support El Salvador’s bitcoin gambit comes as unsurprising to both bitcoin bulls and crypto skeptics. Crypto mining uses considerable energy, for one thing. So much so, in fact, that China’s government blamed their misses on energy targets last month directly on crypto miners, kick-starting a crackdown that has driven many bitcoin enthusiasts out of the country.
For another thing, the World Bank is likely not eager to help any country set up a currency system that could lead to a decentralized financial system. Bitcoin is completely independent of oversight from any central institution or government. It’s “governed” in a literal sense by the code that comprises the blockchain, but no singular entity is in control of the currency. No organization can issue new coins, and no banks set the policies that control the currency’s code.
As such, the World Bank’s refusal to assist El Salvador is seen by bitcoin enthusiasts as par the course. Meanwhile, detractors are taking this as a sign that cryptocurrency in general is not worth the investment.
Is This Bad for El Salvador?
Some analysts have dismissed the bitcoin news as being a distraction from what really matters regarding El Salvador’s place in the international market.
“Whether El Salvador is going to be attractive (for investors) or not is going to depend on Bukele’s ability to use his unquestionable political capital to bring a large consolidated fiscal deficit into control,” argues Emso Asset Management head researcher Patrick Esteruelas. Esteruelas has characterized bitcoin as “marginal” when it comes to El Salvador’s overall financial picture.
El Salvador doesn’t seem intimidated by institutional pushback, either: Bukele retweeted a news story on Tuesday that claimed interest in El Salvadoran real estate is at an all-time high thanks to the country’s recent crypto decision.