Legal Tender: El Salvador Bets on Bitcoin

In San Salvador on Tuesday evening, after a proposal and hard-sell by populist President Nayib Bukele, the Legislative Assembly of El Salvador passed a slim three-page bill enshrining Bitcoin as a legal tender currency within the country – a designation previously held solely by the U.S. dollar. In the West, Bitcoin has been generating a great deal of buzz over the past few months – both for its affiliation with tech titans like Elon Musk and, more recently, by the endorsement of blue-chip financial institutions, including BlackRock and JP Morgan. It’s one of the hottest debates on Wall Street today: are digital currencies the true wave of the future, threatening to undermine the foundations of the floating global fiat currency system originating in Bretton-Woods, or are they simply, in one famous formulation, just “a hustle.” 

The way that nation-states address this question, and, in doing so, anticipate its implications, may well determine how it’s answered. And nations are indeed taking note. Federal Reserve Governor Lael Brainard has already proposed a plan for a digital dollar. Chair Jerome Powell has announced that the Fed will issue a full report by this summer. The CCP, in turn, recently handed down a blanket ban on cryptocurrencies within China, viewing it as a threat to the sovereignty of the renminbi and, by extension, the Party itself. El Salvador is making the opposite bet: that the move to legalize will attract talented, high-net worth individuals to the country, creating a virtuous cycle of renewed investment, consequently, a solid tax base.

Regional experts have expressed more mixed views, seeing both the promise and the risks of cryptocurrencies for poor countries. As Manuel Orozco, Director of the Center for Migration and Stabilization, indicated in Wednesday’s WSJ:

With a budget gap that widened to almost 10% of gross domestic product last year, the government could convert bitcoin inflows when the price is high to cover the deficit … But it could also be extremely risky for a country with a significant fiscal deficit if things go the other way, given the volatility of bitcoin…

American experts, including AHS Board Member and former Undersecretary of the Treasury for International Affairs Brent McIntosh, have also weighed in on the implications of all the crypto-buzz for the U.S. Dollar:

… [American] efforts aren’t yet coordinated or proactive enough to meet the challenge. Financial regulators and economic policy makers need to set out an agreed-upon plan to deal with the digitization of assets and financial technologies that is based on the current regulatory framework.

In other words, it’s all a complicated business – but also one that, in some sense, requires of states a kind of simple answer. Far from just “a hustle,” nations across the globe seem to think crypto is for real: do you?

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