This week, El Salvador finally officially took up Bitcoin as a form of legal tender. They were immediately rewarded for their trouble by seeing the cryptocurrency’s value tumble from over $50,000 to under $45,000 in a matter of hours. Right away, many crypto naysayers’ worst fears were realized. El Salvador’s economy is now tied in with a volatile digital standard that answers to no central bank, so the whims of investors now drive the country’s markets.
Central banks around the world have issued warnings about the long-term stability of Bitcoin and other cryptocurrencies like it. “Private money usually collapses sooner or later,” says Riksbank Governor Stefan Ingves, per MarketWatch. If an asset isn’t backed by a government, Ingves argues, market force will eventually shear it apart.
Central Bankers Issue Dire Warning
Central bankers around the world have issued warnings about the stability of Bitcoin. The International Monetary Fund and the World Bank both warned El Salvador against taking up Bitcoin as legal tender, but president Nayib Bukele ignored predictions of economic ruin and doubled down on a plan to reinvigorate the Central American country’s economy by picking up the famously volatile coin.
To Bukele’s credit, it’s a big gamble that could pay off in the short term for the country. However, it could also bankrupt the country’s government and could force many businesses to accept a standard that has the potential to collapse in the near future.
“Whoever receives bitcoin in exchange for a good or service, we believe that is more akin to bartering because that person is exchanging a good for a good, but not really money for a good,” Alejandro Diaz de Leon told Reuters on Thursday. De Leon, the Governor of the Bank of Mexico, has been cautious in the past regarding cryptocurrency.
“People will not want their purchasing power, their salary to go up or down 10% from one day to another. You don’t want that volatility for purchasing power. In that sense, it is not a good safeguard of value,” de Leon continues. With this in mind, de Leon insists, Mexico won’t be looking at adopting the cryptocurrency standard as legal tender.
What About Other Countries?
It’s hard to imagine any other countries adopting Bitcoin as legal tender in the near future. El Salvador’s experiment with crypto is starting off on the wrong foot: many people have been seen protesting the move at the country’s capitol building, and the rollout of the official government wallet app was met with bugs that caused the launch to stumble out of the gate.
Some other Central American countries might be more likely to officially adopt cryptocurrency ahead of wealthier countries like the US or the UK, though. For some countries, the prospect of cryptocurrency actually does create an interesting opportunity to address a few economic issues.
In El Salvador, about 70 percent of the population doesn’t have a bank account. Similar numbers can be seen in other Latin American countries that are underserved by local banking institutions. Many of these countries also rely heavily on remittances for their economies to function. Remittances are sums of money sent home by citizens of a country who are living abroad.
Some have argued that Bitcoin opens up remittances significantly by eliminating most fees associated with transferring money across borders. After all, the coin is decentralized, making it perfect for international commerce. Some countries might be less concerned about Bitcoin’s instability and more concerned with its ability to bypass common international regulations.
Coming to the US?
Bitcoin will almost assuredly not become legal tender in the US any time soon. The coin’s extreme volatility makes it more interesting to US enthusiasts as an investment, not as a form of currency. Making purchases with Bitcoin is also a bit unusual in the US: individual coins are worth tens of thousands of dollars. As such, buying a cup of coffee or your lunch with a fraction of a Bitcoin is going a bit overboard.
Some large purchases could become more commonly executed with Bitcoin in the future, though. Tesla briefly allowed customers to buy vehicles with Bitcoin. Some crypto enthusiasts are excited about the potential of self-regulating crypto contracts being used to oversee large transactions like buying a house. Theoretically, two parties wouldn’t even need a realtor if a sufficiently advanced Bitcoin contract was drawn up, though this would require some new laws to be put into place.
The future of Bitcoin is extremely unclear. Central banks continue to issue dire warnings about it while enthusiasts insist that it’s the money of the future. Those who favor decentralization, like Latin American countries, will likely continue to champion the standard even if it tanks in value. Meanwhile, in the US, crypto investors will continue to speculate about the coin’s future performance. But don’t hold your breath for Bitcoin to become legal tender here.