When El Salvador passed a law last week to make the Bitcoin legal tender, it became the first country in the world to do so, drawing sudden, new attention to the potential role of cryptocurrency in global financial systems.
Some fans of Bitcoin have enthusiastically applauded the move, which drew wild cheers when it was announced at the world’s largest Bitcoin conference in Miami last week.
Others warn that while it looks good it theory, it’s not as simple as president Nayib Bukele makes out.
“A little bit of competition certainly never hurts the incumbents,” said Paul Brody, who heads global BlockChain Technology division at Ernst & Young, one of the world’s largest business consulting and accounting firms.
“I don't see this as being unusually harmful. But I'm hard pressed to see it as kind of cure-all,” he told Univision.
Bukele said he hopes that making Bitcoin legal tender will attract badly needed new investment and create jobs, while also helping “provide financial inclusion to thousands outside the formal economy.”
Remittances and migration
Remittances from its citizens living abroad, estimated at $5.9 billion last year, make up about a fifth of El Salvador’s gross domestic product, with companies like Western Union and Moneygram reaping big profits from delivering the mostly small amounts sent.
Bukele says using Bitcoin could vastly reduce that delivery cost, bringing large savings for low income families in Central America's smallest and most densely populated country of about 6.5 million inhabitants.
Strike, a Chicago-based start-up, provides services to fishing and farming families in a surfing community of El Zonte, on the Pacific coast of El Salvador, where they have been using Bitcoin for a year to buy food and pay for utilities.
Bukele also believes it could create jobs and stop the mass migration of Salvadorans to the United States. "If we create more opportunities here, it will decrease the pressure on the border. So everyone should be happy (...), I'm sure it will be good for everyone," he said.
At the same time, Bukele has announced domestic plans to ‘mine’ Bitcoin – a highly energy-intensive process - using local geothermal energy from the country’s numerous volcanoes. By making the country a Bitcoin hub this could attract investment both in the geothermal sector and create a nascent data center, experts say.
“If El Salvador has a lot of geothermal potential that hasn't been exploited, then this could trigger a big rush of foreign investment,” said Brody. “And, over the long term, if hundreds of data centers are established in El Salvador…. it could become more tightly linked to the global information technology network,” he added.
The process of creating Bitcoins, known as ‘mining’ requires immense amounts of computing power to run super computers to solve a random math problems at the heart of the blockchain. “I talk to corporate clients all the time, and enterprises are very aware of the carbon footprint of Bitcoin. If the option was available to carbon offset all of your Bitcoin transactions, they would do it,” said Brody.
Bukele, who likes to tweet, has posted several videos about his ambitious Bitcoin mining plan, mostly in English, indicating that he is aiming to attract outside investors.
Converting El Salvador to Bitcoin might have some advantages but it would be a complicated and perhaps risky move, experts say.
El Salvador is already facing higher interest rates as international investors are worried about the move, in part due to the volatility in the value of Bitcoin, which rose as high as $60,000 in March, before falling to $38,000 this week.
"Remittance service providers and transfer operators need a currency that is stable and tradable, and Bitcoin is not," says Manuel Orozco, the director of the Center for Migration and Economic Stabilization.
The World Bank said Wednesday that it cannot help the implementation of Bitcoin in El Salvador given "environmental and transparency shortcoming," Reuters reported.
Undaunted, Bukele has opened the doors to several Bitcoin entrepreneurs, including Peter McCormack, host of the ' WhatBitcoinDid' podcast, who posed for an official photo in the president's office wearing a Metallica t-shirt.
Bukele, a self-styled political outsider, who has won public support by reducing crime, recently changed his Twitter profile picture to a laser-eyed image of himself, a symbol among Bitcoin advocates who are focused on the currency's value reaching a hundred thousand dollars per unit.
Critics accuse Bukele of a publicity stunt to distract from criticism by human rights groups - and the U.S. government – for his some recent authoritarian moves, including the recent ouster of the country’s attorney general and top judges.
“It’s hard to understand the motivations of Bukele. It looks like an innovative idea. It aligns with his image as being a hipster, cool person,” said José Miguel Cruz, a Salvadoran-born political scientist at Florida International University (FIU).
“El Salvador is not South Korea. It doesn’t make much sense in a country where poverty is rampant and most people don’t have bank accounts. How will people navigate a system that is completely electronic and virtual in a country where people have their savings under the mattress,” he added.
"It feels like we are watching a very fast moving movie," said Jennifer Sanasie, a blockchain commentator told a discussion on 'volcano-powered Bitcoin mining' on CoinDesk TV. "We need to start thinking through things a little bit more thoughtfully. Something is going to happen and we are going to be propelled ten steps backwards," she added.
"I'll take the red tape of bureaucratic processes over the bristling speed of autocracy most days," added Zack Seward, CoinDesk's deputy global news editor.
So, what are the pros and cons? Does El Salvador have what it takes to become a major Bitcoin hub? What implications could Bitcoin have on remittance flows, and the future of the U.S. dollar, which is El Salvador’s main currency?