El Salvador’s ‘stupid’ decision to adopt bitcoin as legal tender could collapse the economy, economist Steve Hanke said

FILE PHOTO: El Salvador President Nayib Bukele speaks at a news conference during a nationwide quarantine as El Salvador's government undertakes steadily stricter measures to prevent the spread of the coronavirus disease (COVID-19), in San Salvador, El Salvador May 26, 2020. REUTERS/Jose Cabezas
El Salvador President, Nayib Bukele.

  • El Salvador’s approval of bitcoin as legal tender could lead to an economic downturn, Steve Hanke predicted.
  • The economist described members of government who passed the bitcoin law as “stupid”.
  • He predicted bitcoin holders in Russia or China would target El Salvador to cash out their holdings.
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El Salvador’s move to classify bitcoin as legal currency has the potential to completely collapse its economy, Steve Hanke, professor of applied economics at Johns Hopkins University, said in a Kitco News interview on Tuesday.

After describing President Nayib Bukele and members of government who voted to pass the bitcoin law as “stupid,” Hanke raised doubts about whether the cryptocurrency could work smoothly for everyday use in a country where most citizens don’t have bank accounts.

The economist, who served on former President Ronald Reagan’s council of economic advisers in the 1980s, suggested criminal interests may have helped bring about the Latin American nation’s adoption of cryptocurrency.

“The criminal element wants to be able to get in and actually obtain real legal greenbacks,” he said. “They want greenbacks. And greenbacks are, in fact, the legal tender and money in El Salvador.”

Hanke predicted bitcoin holders in Russia or China would exploit El Salvador’s citizens to cash out their holdings, ultimately draining the country of US dollars.

“It has the potential to completely collapse the economy, because all the dollars in El Salvador could be vacuumed up and there’ll be no money in the country,” he said. “They don’t have a domestic currency.”

Governments and central banks around the world will be watching El Salvador’s experiment to see whether bitcoin becomes part of daily life for payments and remittances.

But Hanke called the idea crazy, saying the digital asset will need to be converted to US dollars to be used anywhere. “You’re not going to pay for your taxi ride with a bitcoin, it’s ridiculous,” he said.

“If grandma is down in El Salvador waiting for her remittances, and you want to send it with bitcoin, that’s fine. What does she do? She has to go to the ATM to get dollars, because that’s the only way you can buy something,” Hanke said.

But the bitcoin bill mandates every business to accept the cryptocurrency as legal tender, unless it doesn’t have the technology to enable such a transaction. Further, the government is considering whether companies should pay salaries in bitcoin.

JPMorgan said last week that it was difficult to see any benefits of adopting bitcoin as a second form of legal tender, and the move could risk relations with the International Monetary Fund.

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The president of El Salvador says the country is exploring using geothermal energy from volcanoes to mine bitcoin following its decision to make the cryptocurrency legal tender

El Salvador bitcoin
A bitcoin sign in El Salvador.

El Salvador’s president Nayim Bukele took to Twitter on Wednesday for yet another big bitcoin announcement.

This time, Bukele said that he has instructed the president of the country’s state-owned geothermal electric company, LaGeo SA de CV, to “put up a plan to offer facilities for #Bitcoin mining with very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanos.”

The move comes after the country passed a law to make bitcoin legal tender on Wednesday via a supermajority (62 votes out of 84 possible).

Bitcoin’s price rose roughly 10% on Wednesday to trade around $36,000 per coin after the bullish news broke.

Bitcoin mining’s energy-intensive nature has led critics to question its environmental impact over the past few years.

According to data from Cambridge, the bitcoin network’s total energy consumption represents about 0.53% of total global energy consumption, and more than 85% of the energy consumed is used in the mining process.

Critics have argued bitcoin mining could exacerbate climate change, while others, including Cathie Wood of ARK Invest, have said that bitcoin’s power use will only help boost the adoption of renewable mining and solar power.

In other crypto news, Coindesk reported Chinese consumers are currently unable to search for popular cryptocurrency exchanges including Binance, OKEx, and Huobi on popular Chinese search engines in a sign of potential censorship.

China has been cracking down on cryptocurrency mining for some time, even going so far as to block the social media accounts of prominent crypto influencers over the weekend.

Last month, crypto miners were forced to halt operations in China after the country implemented tighter regulations. Chinese government officials have previously stated they would target the crypto industry to try to reach net-zero emissions by 2060.

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