El Salvador president’s unprecedented bitcoin experiment overshadows a more conventional power-grab

El Salvador President Nayib Bukele in February.
El Salvador President Nayib Bukele in February.

  • El Salvador has introduced Bitcoin as an official currency as part of a plan by President Nayib Bukele.
  • Despite Bukele’s strong approval, more than two-thirds of Salvadorans don’t like the Bitcoin plan.
  • The plan also comes amid a power-grab by Bukele that legal scholars have called unconstitutional and other countries, including the US, have criticized.
  • See more stories on Insider’s business page.

Nayib Bukele, El Salvador’s millennial president, is used to making decisions that ring alarm bells among democracy advocates while triggering little concern at home, where he remains wildly popular.

But El Salvador’s dramatic moves of the past few days have had the unprecedented effect of producing sharp rebukes across multiple sectors in and out of the country, while generating great excitement in the world of Bitcoin devotees. They were thrilled to see the iconoclastic leader make El Salvador the world’s first country to make the cryptocurrency legal tender.

Starting Tuesday, Bitcoin became an official currency in El Salvador, along with the US dollar, whose adoption two decades ago crushed inflation and brought a measure of stability to a country that had suffered wild economic swings.

More on the digital currency in a moment. But first, it’s important to note the context, in terms of what else is happening in El Salvador.

Just days before Bitcoin’s introduction, the country’s top court issued a ruling that essentially overrode the constitution, allowing a president to seek consecutive reelection and thus opening a path for Bukele to extend his presidency.

Earlier, the Bukele-controlled legislature had fired five key members of the Supreme Court and the attorney general, in a power-grab legal scholars called unconstitutional and several democratic countries, including the United States, sharply criticized. The replacement judges, loyal to Bukele, were the ones who opened the door to a consecutive second term in office for him.

Bitcoin El Salvador protest
Many in El Salvador oppose the introduction of bitcoin as legal tender.

Separately, just days ago, Bukele’s party passed a series of legal reform bills that, among other things, would remove hundreds of judges and prosecutors, cementing his hold on the judiciary. Enfeebled opposition parties cried foul, while the U.S. Embassy again decried the mounting evidence of “democracy in decline in El Salvador,” comparing Bukele to the late Venezuelan President Hugo Chavez.

Against this backdrop, Bukele, the former public relations executive, was no doubt happy to see world headlines and local attention turn instead to the introduction of Bitcoin and his role as the cutting-edge visionary bringing digital currency to prime time.

Bukele had announced his plan to make Bitcoin legal tender in June, in an English-language video address to a gathering of Bitcoin proselytizers in Miami, where it was greeted with rapturous applause. Within three days of the announcement, the National Assembly approved the controversial plan without any meaningful debate.

Despite the president’s approval rating, which according to most polls remains firmly above 80%, some 68% of Salvadorans don’t like the Bitcoin plan.

The idea has never been tried before, and it’s possible it will bring great benefits to El Salvador’s impoverished people. But the negative reaction from financial analysts and development specialists shows that, at the very least, it deserved more scrutiny.

The World Bank and the International Monetary Fund opposed it. The credit ratings agency Moody’s downgraded El Salvador’s rating because of it, and others issued warnings.

Making the case for Bitcoin, Bukele says it will save Salvadorans hundreds of millions of dollars in transaction fees. Remittances from Salvadorans working abroad make up more than 20% of the country’s GDP. Most people don’t have bank accounts and work in the informal, cash economy, so they have to pay steep fees to cash the checks from relatives abroad.

Bukele says the Bitcoin economy will also attract foreign investment and bring a wave of growth and development.

A demonstrator holds up a sign against the government's Bitcoin law during a LGBT community Pride parade on June 26, 2021 in San Salvador, El Salvador
A demonstrator protests the government’s bitcoin law during a LGBT community Pride parade in San Salvador, June 26, 2021.

Critics point to some of the obvious risks of his plan. On Tuesday morning, the day of the cryptocurrency’s introduction, Bitcoin’s price plummeted 17% before recovering some of its losses.

The notoriously volatile currency can swing in hours more than most currencies move in a year. In a country where the per capita GDP amounts to less than $300 per month, that could be devastating for individuals who put their savings into Bitcoin. It could also be catastrophic for the economy and for the treasury, which could see the value of its tax collections sharply eroded, making reliable planning all but impossible.

Just as disturbing is the one characteristic of cryptocurrencies that has made them a favorite for criminals: their lack of transparency. By making El Salvador the first country on Earth where everyone – including the president, judges and police officers – will have a Bitcoin account, Bukele is throwing gasoline on the destructive flames of corruption.

He may well turn his country into a global epicenter for money laundering. The influx of dirty money could propel a deceptive wave of prosperity, one that is accompanied by a surge of criminality whose harm will ultimately outweigh any benefits.

One thing is certain: Bukele’s introduction of untraceable Bitcoin is good news for drug cartels and other criminal enterprises.

The law requires that “every economic agent must accept Bitcoin as payment,” a mandate that has alarmed some economists and students of totalitarianism. Bukele later softened the mandate, saying the use of Bitcoin is optional. But it remains unclear whether penalties will be imposed against businesses that refuse to accept it.

El Salvador's President Nayib Bukele addresses the nation during a live broadcast to speak about his bitcoin legal tender plan, at the Presidential House in San Salvador, El Salvador June 24, 2021
Bukele during an address about his bitcoin legal tender plan, at the Presidential House in San Salvador, June 24, 2021

The World Bank rejected Bukele’s request for assistance in introducing the currency, arguing that it would be harmful to macroeconomic stability and noting the high environmental cost of Bitcoin “mining,” which requires enormous amounts of electricity to power the server farms that “create” new coins.

The introduction of Bitcoin has also complicated the country’s path forward with the IMF. Officials were negotiating a $1.3 billion aid package, but El Salvador’s financial footing now looks uncertain.

Although the 2001 dollarization program – which phased out the old currency, the colon – limited the government’s ability to control monetary policy, it brought a measure of fiscal discipline and predictability whose absence had previously crippled the economy.

Despite this week’s rocky rollout, Bitcoin will in all likelihood eventually make its way through the economy. Bukele has launched a grand experiment, turning his country, and its people, into the digital currency lab that many Bitcoin faithful had long hoped to see.

If El Salvador’s Bitcoin experiment is unprecedented, the same can’t be said for the other measures Bukele is taking, like dismantling judicial independence, taking full control of all the branches of government and installing a personality-driven government in which institutions gradually become beholden to one man.

We have no historical experience to turn to for guidance on how the cryptocurrency experiment will end. Unfortunately, we’ve seen the other experiment many times before, especially in Latin America. It does not end well, and it can take a very long time before it does.

Frida Ghitis is a world affairs columnist. A former CNN producer and correspondent, she is a regular contributor to CNN and The Washington Post. Her WPR column appears every Thursday. Follow her on Twitter at @fridaghitis.

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Bitcoin drops another 5% a day after the crypto market shed $360 billion during El Salvador’s BTC rollout

Bitcoin el salvador protest
Many in El Salvador oppose the introduction of bitcoin as legal tender.

  • Bitcoin and ether fell further on Wednesday after plunging during El Salvador’s BTC rollout on Tuesday.
  • Analysts said price falls on Tuesday were accelerated by high levels of leverage in crypto markets.
  • Glitches on exchanges such as Coinbse and Kraken also worsened the situation, analysts said.
  • See more stories on Insider’s business page.

Bitcoin and ether fell again on Wednesday before regaining some ground after plunging during El Salvador’s bumpy bitcoin rollout the day before, with more than $360 billion wiped off the highly leveraged crypto market in just two days.

Bitcoin fell as much as 5% on Wednesday, according to Bloomberg data, before paring losses. It was 1% lower by 9.50 a.m. ET to trade at $46,347, after a two-day drop of 11%.

Ether, the second biggest cryptocurrency by market value, also fell as much as 5% before rebounding somewhat. It stood 0.6% lower at $3,390 early Wednesday, with its two-day fall coming to 14%, Bloomberg data showed.

Cryptocurrencies began to crater on Tuesday as El Salvador made bitcoin legal tender in a landmark moment for the world’s biggest cryptocurrency. The rollout was afflicted by glitches, with the small central American country’s Chivo wallet having to be taken offline.

“Bitcoin is lower on a ‘buy leading up to the big event, sell the fact’ reaction to El Salvador’s historic moment embracing bitcoin,” Edward Moya, senior market analyst at trading platform Oanda, said.

Bobby Ong, chief executive of crypto data company CoinGecko, agreed with Moya’s analysis and said the price falls were so steep due to the effects of leverage in crypto markets.

Read more: The head of research for a blockchain analytics firm breaks down why bitcoin and ethereum can reach $100,000 and $10,000 respectively by next year

Many of the world’s biggest cryptocurrency exchanges such as Binance allow users to borrow large sums to bet on the markets. Yet when prices fall, investors often have to sell out of their positions, or exchanges liquidate them automatically to limit losses.

Matt Blom, head of sales trading at Nasdaq-listed crypto firm Eqonex, said: “Heavy selling on derivatives platforms… caused a cascade of auto-liquidations, like a line of dominoes,” he said. “Over $2 billion of long positions were liquidated in under 20 minutes.”

Matters weren’t helped by problems on major cryptocurrency exchanges Coinbase, Kraken and Gemini, which led to transactions being delayed or canceled.

Coinbase said its issues were caused by “a sudden increase in network traffic and market activity” that led to a “degradation in our services.”

So-called altcoins such as cardano, binance coin, XRP and dogecoin were also nursing heavy losses after falling sharply on Tuesday and Wednesday. The Bloomberg Galaxy Crypto Index, which tracks a range of crypto tokens, was down 0.7% on Wednesday and had shed 11.5% over two days.

The total market value of all cryptocurrencies stood at $2.01 trillion on Wednesday, more than $360 billion below its Tuesday peak.

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Mike Novogratz says the bitcoin market got too excited before the latest crash – and singles out highly leveraged retail traders

Mike Novogratz
  • Crypto billionaire Mike Novogratz said Tuesday’s bitcoin crash came after the market got too excited.
  • He said retail investors using large amounts of leverage were a key factor in the sharp drawdown.
  • Bitcoin fell as much as 17% on Tuesday as the cryptocurrency became legal tender in El Salvador.
  • See more stories on Insider’s business page.

Crypto billionaire Mike Novogratz has said the latest plunge in bitcoin is the result of investors getting too excited about recent developments in the crypto space, and said excess leverage had fueled the volatility.

Bitcoin dropped as much as 17% on Tuesday after El Salvador’s rollout of the cryptocurrency as legal tender was afflicted by glitches. It was around 1% lower at $46,420 on Wednesday, down from above $52,000 early Tuesday.

“I think we just got too excited and this was a little air being popped out of the balloon,” Novogratz said in a Bloomberg TV interview on Tuesday. “The market got too long.”

Novogratz, who runs crypto investment firm Galaxy Digital and is an influential figure in the space, said large amounts of leverage in the system contributed to the steep falls.

“There’s lots of retail money, a lot of it’s leveraged,” he said. “There was about $4 billion of liquidations that happened in a short period of time… That’s mostly leveraged offshore in places like FTX and Binance.”

Read more: A research analyst at a $2 billion crypto firm lays out the bull case for polkadot that most investors are overlooking – and shares why cardano’s ada is looking overvalued after a stellar run

Exchanges such as Binance, Bybit and Huobi allow users to borrow large sums to trade with. Analysts said in recent weeks, traders had been using this leverage to “go long” – that is, bet that the price will rise – on bitcoin and other cryptos.

When cryptocurrency prices fall, traders who have gone long using leverage often sell out of their positions, or the exchange automatically liquidates them to limit losses. This often sends prices down further, triggering more liquidations in a cascade effect.

Novogratz told Bloomberg he thought the market had become excited with good reason. He said Visa buying a non-fungible token for $150,000 and Amazon posting a crypto job opening had made many people think the technology is here to stay.

He said he was confident El Salvador would succeed in its bitcoin rollout, saying the token could become used to send remittances.

“Whenever you’re doing a new technology rollout there are glitches,” he said. “Come back in six weeks or 12 weeks and let’s talk about how it’s working.”

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El Salvador just bought 400 bitcoin and plans to buy ‘a lot more,’ a day before making it an official currency

El Salvador President Nayib Bukele in February.
El Salvador President Nayib Bukele in February.

  • El Salvador bought 400 bitcoin on Monday and plans to buy “a lot more,” President Nayib Bukele said.
  • The purchase comes just a day before El Salvador makes bitcoin official currency.
  • The bitcoin transition hasn’t been so smooth, with Salvadorans protesting, confused by the rollout.
  • See more stories on Insider’s business page.

El Salvador bought its first 400 bitcoin and plans to soon buy “a lot more,” as the country nears the Tuesday deadline to make bitcoin the country’s official currency, President Nayib Bukele tweeted on Monday.

“El Salvador has just bought its first 200 coins,” Bukele said in a series of tweets on Monday. “Our brokers will be buying a lot more as the deadline approaches.”

Hours later, Bukele said the country bought an additional 200 bitcoin, giving it a total of 400 bitcoin.

The bitcoin purchases, coming just a day before El Salvador’s bitcoin law will come into effect, amount to roughly $20 million as of Monday’s price.

It’s the first step toward El Salvador’s ambitious attempt to make bitcoin legal tender, which is set to draw a lot of attention from cryptocurrency enthusiasts to monetary policy experts around the world – while transforming the daily life for Salvadorans.

In June, El Salvador passed a law that will make it the first country to establish bitcoin as legal tender alongside the US dollar, the country’s current national currency. All entities in the country will now have to accept bitcoin as a payment method for goods and services, and Salvadorans will be able to use the cryptocurrency to pay taxes.

El Salvador is the smallest country in Central America in terms of population, according to the World Bank. Its economy is the 106th out of the 195 countries the International Monetary Fund ranks.

The country’s looming bitcoin rollout has not been so smooth. Salvadorans complain they have received little official communication from the government, leaving them in the dark on what the transition will mean for them. Global banks and rating agencies have questioned the decision, saying it could jeopardize the much-needed IMF lending talks, hurt local insurers, and even weaken the bitcoin network.

Last month, protests erupted in the capital city of San Salvador, with people fearing for their pension payouts potentially getting wiped out and money laundering activity increasing in a country where corruption is endemic. A poll taken in July found that 75% of Salvadorans have reservations about the law.

Still, Bukele seems confident in the country’s looming bitcoin adoption. In a Twitter thread last month, the 40-year-old president called the opposition “liars” who would be exposed once the law comes into force. He said those worried about their pension or businesses will be able to keep dealing in dollars as usual, since bitcoin use isn’t mandatory.

On Monday, Bukele expressed the same level of confidence in his Monday tweet.

“Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador,” Bukele wrote. “#Bitcoin did this.”

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El Salvador is set to make bitcoin an official currency next week. But a messy rollout has marred the process amid anti-bitcoin protests in the country’s capital.

El Salvador's President Nayib Bukele addresses the nation during a live broadcast to speak about his bitcoin legal tender plan, at the Presidential House in San Salvador, El Salvador June 24, 2021.
El Salvador’s President Nayib Bukele on June 24 addressing the nation about his bitcoin legal tender plan.

  • On September 7, El Salvador’s bitcoin law will come into force.
  • The law, revealed at a Miami convention on June 5, will transform El Salvador’s economy.
  • But the breakneck rollout has been marred by local protests, global outcry, and general confusion.
  • See more stories on Insider’s business page.

El Salvador’s bold experiment in making bitcoin official currency has moved in just three months’ time from concept to execution. This coming Tuesday, the bitcoin legal tender law will come into force. Then, the real experiment will begin.

The law, revealed at a Miami convention on June 5, will transform El Salvador’s economy, nearly a quarter of which came from remittances in 2020. It will affect local business, global investment, and daily life for Salvadorans.

Yet it was passed by congress three days after being announced with just a few hours of debate.

Preparation and rollout of the law has been messy. Salvadorans complain they have no idea what the law will mean for them, saying they have received little official communication. Global finance from big banks to rating agencies say the law could jeopardize much-needed IMF lending talks, hurt local insurers, and even weaken the bitcoin network.

As the law’s implementation date – which some call “B-day” – looms, opposition has mounted. Protests erupted in San Salvador, the capital, as pensioners feared their payouts could be forcibly denominated in the highly volatile crypto-asset.

Other protesters said the law could exacerbate money laundering in a country where corruption is endemic. The protests appear to be speaking for a broader public sentiment, too. A poll taken in July found that 75% of Salvadorans have reservations about the law. About half said they knew nothing about it.

The government has still yet to finish creating rules for how the move to bitcoin will work. The original bill – revealed to the world via president Nayib Bukele’s prolific Twitter account – will require businesses to accept bitcoin, but contains a possibly massive carve-out for businesses that don’t have the technological know-how.

Bukele has shrugged all this off – and has hit back at the law’s critics. In a Twitter thread, the 40-year-old president denounced the opposition as “clumsy,” saying they were “liars” that would be exposed as soon as the law comes into effect. For those Salvadorans worried about their pension or business, Bukele insists everyone will be able to keep dealing in dollars as usual. Bitcoin use isn’t mandatory, he says.

Some parts of the president’s rollout are starting to coming together. Alongside an American bitcoin firm called Strike, the government has set up hundreds of bitcoin ATMs to go with a new digital wallet called Chivo, Spanish for “cool.” It is starting to run TV infomercials to educate the public. And the central bank in late August put out preliminary banking rules governing the move to bitcoin.

But banks have only until this coming Monday to comment on the new regulations – one day before the law takes effect.

The ATMs, too, come with a bit of a catch. While Bukele has pitched bitcoin as a way for Salvadorans to dodge pricey fees at remittance companies like Western Union, some ATMs appear to charge withdrawal fees of their own. One used by an Economist journalist in San Salvador charged 5%.

Many crypto enthusiasts are still standing squarely behind Bukele. Mario Gomez Lozada, CEO of crypto trading platform PowerTrade and himself a Salvadoran citizen, told Insider that bitcoin was bringing hope to El Salvador.

“There are so many people getting eaten alive by remittance fees. Bitcoin provides a fee-free path to send money home,” said Gomez Lozada. “I think all the countries in Latin America will follow: Paraguay, Argentina, and so on.”

“I never thought I would witness my home country filled with so much hope for the future, let alone leading the way for others,” he said.

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75% of Salvadorans have reservations about their country’s decision to adopt bitcoin as official currency as confusion reigns

New Salvadoran President Nayib Bukele speaks after receiving the presidential sash during a swearing-in ceremony in San Salvador, El Salvador June 1, 2019. REUTERS/Jose Cabezas
Inauguration ceremony of the new President of El Salvador Nayib Bukele

  • After president Nayib Bukele ushered in the bitcoin legal tender law in June, Salvadorans have waited for months on detailed government rules outlining how exactly adoption will work.
  • An opinion poll in July found that three out of four Salvadorans harbored reservations about the imminent bitcoin adoption.
  • With one week until bitcoin is set to debut in El Salvador, Bukele is defending the law, calling its critics “liars” and saying anyone with reservations should simply continue using dollars.
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El Salvador’s ambitious attempt to make bitcoin legal tender has run headfirst into confusion and popular unease, with three-fourths of Salvadorans expressing reservations about the country’s decision, according to a new Reuters report.

After president Nayib Bukele ushered in the bitcoin legal tender law in June, Salvadorans have waited for months on detailed government rules outlining how exactly bitcoin adoption will work in the country’s dollarized economy.

But an opinion poll in July found that three out of four Salvadorans harbored reservations about the imminent bitcoin adoption. None of the 18 people interviewed by Reuters in the capital city of San Salvador had heard any official explanation of the new law.

“I prefer the dollar, because we already know it and know it well, there’s no problem,” Jose Guardado, a farmer who lives near San Salvador, told Reuters. “But as we don’t know [bitcoin], we don’t know how it will work.”

Nearly a quarter of 2020 GDP came in the form of remittances, meaning the details of payment technology make a massive difference to daily life. Bitcoin is touted as eliminating the commissions that Salvadorans currently pay on cross-border transfers via outlets like Western Union.

With one week until bitcoin is set to debut in El Salvador, Bukele is defending the law, calling its critics “liars” and saying anyone with reservations should simply continue using dollars – and paying commissions on remittances.

“The clumsy opposition always plays single-move chess,” Bukele tweeted last week in a Spanish-language thread punctuated by the bitcoin hashtag. “They have bet everything on scaring the population about the bitcoin law and maybe they’ll achieve something, but only until September 7.”

Bukele’s government is still rolling out hundreds of bitcoin ATMs across the country, linked to a new electronic wallet called Chivo (meaning “nice”), according to Reuters. Early birds will get around $30 in bitcoin, he boasted on Twitter.

Late last week, protests erupted in San Salvador, led by pensioners who fear bitcoin adoption could erode their payouts. Other protesters said the move would exacerbate money laundering.

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Protests are breaking out against El Salvador’s planned bitcoin adoption, with demonstrators decrying the token’s volatility and potential for corruption

FILE PHOTO: President of El Salvador Nayib Bukele speaks in a news conference about government security policy in San Salvador, El Salvador July 2, 2019. REUTERS/Jose Cabezas
President of El Salvador Nayib Bukele speaks in a news conference about government security policy in San Salvador

  • Protesters late last week took to the streets to oppose El Salvador’s bitcoin adoption.
  • The protests appeared to be part of a broader mobilization by pensioners demanding higher payouts, according to local media reports.
  • President Nayib Bukele’s move to bring on bitcoin as his country’s legal tender by September 7 has prompted criticism by big-money players like ratings agencies and banks.
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Honking cars and bullhorns rang out in San Salvador late last week as protesters took to the streets to oppose El Salvador’s imminent bitcoin adoption, according to several reports.

Bearing signs like “No to corrupt money laundering!” and “We don’t want bitcoin,” protesters in El Salvador’s capital decried the cryptocurrency’s volatility and opacity, according to a Reuters journalist at the scene.

“We know this coin fluctuates drastically,” a labor union representative at the protests told Reuters. “Its value changes from one second to another and we will have no control over it.”

The anti-bitcoin protests appeared to be part of a broader mobilization by pensioners demanding higher payouts, according to local media reports cited by CoinTelegraph. Some were wary of the government doling out pension benefits in bitcoin, which could hurt pensioners’ purchasing power in times of volatility.

President Nayib Bukele’s move to bring on bitcoin as his country’s legal tender by September 7 has prompted criticism by big-money players like ratings agencies and banks, who fear the country will jeopardize a key International Monetary Fund loan negotiation.

In the past month, Moody’s downgraded El Salvador’s sovereign debt, while Fitch Ratings did the same for local insurance companies. Both ratings agencies cited the bitcoin law’s steep downside risks and hasty implementation.

“The law was adopted extremely quickly, without a technical study or a public debate,” Ricardo Castañeda, a Salvadorean economist, told the Guardian. “I don’t think the president has fully understood the implications of the law, its potential to cause serious macroeconomic problems and convert the country into a haven for money laundering.”

“The shift from euphoria to skepticism has been very fast,” he added.

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El Salvador’s President says the country has prepared to adopt bitcoin as legal currency in September by installing 200 ATMs and prepping bank branches to handle crypto

A woman withdraws money from a bitcoin ATM in El Salvador.
A woman withdraws money from a bitcoin ATM in El Salvador.

El Salvador President Nayib Bukele said his country is gearing up for its cryptocurrency adoption by building infrastructure to support his ambitious goal.

The millennial president announced that El Salvador is installing 200 ATMs and preparing over 50 bank branches ahead of the implementation on September 7, according to a Sunday tweet thread.

This will go hand in hand with the government’s cryptocurrency app called Chivo, which can be viewed as a digital wallet that is accessible to both citizens and tourists. Those who download the app will receive $30 in bitcoin. Chivo, according to previous reports, will allow users to automatically convert bitcoin into US dollars.

Transactions in the app will be commission-free, saving the Central American country $400 million per year in fees, Bukele said in a tweet.

Bukele in June announced the country’s intention to become the first in the world to accept bitcoin as a legal tender alongside the US dollar, drawing both praise and backlash.

Many critics have questioned the decision, pointing to bitcoin’s intense volatility. The cryptocurrency has lost almost 25% of its value since hitting an all-time high of nearly $65,000 in April. It is trading around $49,000 as of August 23.

The president has emphasized that no one will be forced to use bitcoin, which he also reiterated in his Twitter thread.

The legislation, dubbed the Bitcoin Law, has touted financial inclusion and economic growth as reasons for adopting bitcoin, highlighting the 70% of El Salvadorans who are unable to access “traditional financial services.”

Still, international organizations including the International Monetary Fund and the World Bank, as well as major banks such as JPMorgan and Bank of America have expressed concern.

A small survey conducted in June by a university in El Salvador also suggested that a majority of citizens don’t understand cryptocurrency and are skeptical of Bukele’s move to make bitcoin legal tender.

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Bitcoin could boost El Salvador’s economy by making overseas payments cheaper and boosting US business, Bank of America says

bitcoin payment el salvador people buying
  • Bitcoin could boost El Salvador’s economy by lowering overseas payments costs, Bank of America said.
  • The bank also said it could help digitize the economy and increase investment from the US.
  • But BofA remains pessimistic about the move overall, largely due to bitcoin’s wild volatility.
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Like many financial institutions, Bank of America says there are more risks than potential benefits to El Salvador’s adoption of bitcoin as legal tender.

Yet the bank’s analysts said in a note last week that there could be a number of benefits, including making it easier for migrants to send money back to El Salvador; helping digitize banking; and increasing business with the US.

“The market has been excessively pessimistic about it and is overlooking any argument in favor, even if those benefits are admittedly more uncertain,” the analysts, including Latin American strategist Claudio Irigoyen, wrote.

Worker remittances could be cheaper

Like many developing countries, remittance flows are worth a substantial amount to El Salvador’s economy, at 24% of GDP, due to workers leaving the country and sending money home.

Using bitcoin could therefore benefit the economy by lowering transaction costs on remittances to the Central American country, BofA said.

The average transaction cost of bank-based cross-border remittance is over 10%, but could be much cheaper if bitcoin is used. However, bitcoin is highly volatile and transaction fees can vary.

Read more: The head of research at a crypto firm who called bitcoin’s surge to $60,000 last year breaks down why it will reach $250,000 by 2025 – and shares 2 altcoins that could go up 20 times

Bitcoin can help the economy digitize

Currently more than 70% of El Salvador’s adults don’t have a bank account, BofA said. But bitcoin is a form of digital money that can be easy to use, for example through mobile phone apps.

“For that reason, democratizing access to electronic payments, through bitcoin, has a progressive touch,” BofA’s analysts said.

Adoption could increase business with US firms

The US is a crypto hub, and El Salvador’s adoption of bitcoin could see American firms move into the country to take advantage of the change – and bring investment with them.

“There could be [foreign direct investment] from Strike (developer of the payments platform), bitcoin miners, ATM manufacturers, among other types of firms,” BofA said.

Bitcoin miners may be attracted to geothermal energy from El Salvador’s volcanoes, for example. Yet overall electricity costs are relatively high, making large-scale mining unlikely.

Yet BofA says bitcoin adoption is overall negative

To be clear, Bank of America still isn’t keen on El Salvador’s adoption of bitcoin as legal tender. This is largely down to bitcoin’s wild volatility, with the world’s biggest cryptocurrency known to swing 10% in a day and plunge 50% in a matter of weeks.

Allowing people to pay taxes in highly volatile bitcoin is particularly worrying, and could lead to sharp falls in revenues if the price tumbles, the bank said.

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Cryptocurrencies are taking the developing world by storm, with more users now in Nigeria than in the US – 2 experts lay out how bitcoin is changing emerging-market finance

Globe
Globe

  • Insider spoke to James Butterfill from CoinShares and Marius Reitz from Luno in Africa about bitcoin in the developing world.
  • El Salvador recently made bitcoin legal tender and other governments may follow suit.
  • Cryptocurrencies can bring finance to the “unbanked” and help counter volatile domestic currencies, the two experts said.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Cryptocurrencies have made it into the mainstream this year, with crypto-backed bank cards, investment products and traders, both big and small, have got in on the action, driving the likes of bitcoin, ether and dogecoin to record highs.

In the developing world, crypto adoption is growing at breakneck speed. Young, fast-growing populations that lack access to traditional finance, but have smartphones, from Brazil to Botswana, are driving the surge in the use of cryptocurrencies.

James Butterfill, who is an investment strategist at CoinShares, the largest crypto exchange traded product provider in Europe, and Marius Reitz, the general manager in Africa of crypto exchange Luno discussed the social benefits of bitcoin for the developing world.

“In third-world countries, we are seeing the take-up of bitcoin. If you look at bitcoin volume growth, it’s massive,” Butterfill told Insider.

For example, according to a Statista survey of global consumers in February, nearly one in three of those polled in Nigeria said they owned, or used, cryptocurrencies, versus just 6 out of every 100 in the United States, in 2020.

El Salvador’s recent decision to make bitcoin legal tender is an example of how developing countries are using crypto. The World Bank recently said it would not work with the country on its cryptocurrency plans because of how volatile it believes these assets are.

The amount of bitcoin that changes hands in emerging economies is exploding. Trading volumes in Brazil have risen 2,247% year-on-year in 2021, while in Venezuela, where political turmoil has created hyperinflation and economic crisis, crypto trading volumes have risen 833% in the last 12 months, according to data provider Kaiko.

In Nigeria, Africa’s largest economy, trading volumes have risen 128% year on year, and in Turkey, where inflation and economic decline have hit the lira, they’re up 143%, based on Kaiko’s data.

Bitcoin has been trading between $40,000 and $31,900 over the last month, but has moved between lows of $30,000 and to highs of as much as $63,500 over the course of 2021. Despite its volatility, consumers in developing countries love it.

There are about 1.7 billion people that are considered “unbanked”. However, around 48% of the global population has a smartphone and that percentage, in theory, have access to the internet, and therefore, cryptocurrencies, Butterfill said.

In Latin America, only 30% of the population over the age of 15 have a bank account, according to 2019 data by consultant Mckinsey.

“I think that really is a positive thing that bitcoin’s helping the unbanked be bankable,” Butterfill said.

A closer look at Africa

Crypto use has also grown in Ghana, Kenya, South Africa, Botswana and Zimbabwe.

“One region that may go unnoticed in the development and usage of cryptocurrencies, is Africa. The continent is one of, if not the most promising, regions for the adoption of cryptocurrencies due to its unique combination of economic and demographic trends,” Luno’s Reitz said.

One of the key factors that is encouraging people in Africa to use cryptocurrency is the cost of transferring money. The World Bank reported in 2020 that sending money to Africa via traditional bank transfer cost an average fee of 8.9% compared to the global average of 6.8%.

Sending money abroad, or even receiving funds from overseas, is littered with additional costs, including exchange rates and this is where crypto is helping fill that gap.

“It’s either really expensive, or really difficult to do. So, with something like bitcoin, you can have an international bank account and it costs you virtually nothing, that’s what’s really powerful about it,” CoinShares’ Butterfill said.

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