Millions of investors holding crypto assets are reeling. After a brutal six months that saw more than $1 trillion in value wiped out, some of the losers are big names, like Vitalik Buterin, the creator of Ethereum, and Mike Novogratz, the hedge fund luminary who backed the now-collapsed Luna digital coin . Others are tiddlers. But one of the most interesting is the government of El Salvador.
About a year ago, Nayib Bukele, the country’s populist president, announced plans to become the first nation to adopt bitcoin as legal tender alongside the US dollar. IMF officials and western central bankers condemned the idea as something only a president with a shaky understanding of economics could embrace. Bukele didn’t help his cause when he tweeted: “#Bitcoin has a market cap of $680 billion. If 1% of that was invested in El Salvador, that would increase our GDP by 25%,” which seemed to have fundamentally misunderstood how Bitcoin and GDP work.
Bukele defiantly bought heaps of bitcoin (and spent more than $100 million to date, according to my colleague Robin Wigglesworth) and urged its citizens to download digital wallets, which more than half of its 6.5 million residents did. Since then, however, this crypto store has lost about a third of its value, leaving the country with $40 million in paper losses. This is a painful blow to a nation already in dire fiscal straits.
Is El Salvador Ready to Give Up Its Embrace of Cryptocurrencies? Last week I spoke to Suecy Callejas, a former ballerina and lawyer who is now both Minister of Culture and Acting Chair of the National Congress. Her message was a defiant “No”.
Callejas told me that from the perspective of an emerging market politician, Bitcoin looks different than Western critics – or traditional economists. In these troubled geopolitical times, your points are worth noting even if you disagree.
Your first point concerns poverty. About 70 percent of El Salvador’s population currently has no access to the banking system. But more than half have cellphones, albeit with patchy internet service. So offering digital wallets can “promote financial inclusion,” according to the government’s reasoning.
A second problem, Callejas said, is that El Salvador’s economy relies on remittances from foreign workers, which accounts for about a quarter of the country’s total gross domestic product. Currently, people are “losing nearly 20 percent” of that money to the high transfer fees charged by companies like MoneyGram and Western Union. Using digital wallets for remittances may be far cheaper.
Additionally, the country’s citizens have experienced so much volatility that they are less shocked by currency fluctuations. “We know money always fluctuates,” she said. “Now bitcoin is losing 25 percent of its value, but maybe in a few weeks bitcoin will recover.”
Finally, there is the question of geopolitics. El Salvador hates being at the mercy of Washington politics. And not just because the country, like many other emerging economies, suffers severely when dollar interest rates fluctuate.
The wave of Western sanctions against Russia has fueled fears that the US is increasingly using the dollar as a political weapon. “We are a small country and we are vulnerable,” Callejas explained. “We’re trying to be more independent and sovereign.”
Western financial officials and the powerful IMF would retort that Bitcoin is the wrong “solution” to these problems. You may be right. Crypto technology is so clunky that there is little evidence that it is widely used to pay for things. And concerns about cyber theft and the energy consumption it takes to mine digital currencies linger for good reason.
But what Westerners also need to understand is that resentment against the dollar-based system is growing in the non-Western world. In fact, Bukele isn’t the only leader curious about crypto. Last week, his government held a conference about its experiences in what it called its so-called Bitcoin beach zone, and finance officials from dozens of other emerging markets attended. According to a study by the cryptanalysis group Chainalysis, the highest per capita use of crypto is now predominantly in emerging markets.
That makes sense. As Hyun Song Shin, economic adviser at the Bank for International Settlements, along with colleagues have noted, in regions with weak confidence in fiat currency, this “cost” (i.e., risk) appears to be relatively small, while the frictions associated with bitcoin appear excessively high to Westerners.
So perhaps El Salvador’s experiment will end in tears. It definitely looks risky. But the West must recognize that ignoring the sense of economic despair – and frustration with the dollar-based world order – that prompted the move would also be risky. Especially at a time when economic hardship is spreading and becoming the new topic of the times.
Follow Gillian on Twitter @gilliantett and email her firstname.lastname@example.org
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Source: Crypto News Austria