Bitcoin is undergoing the biggest test in its 12-year history as El Salvador becomes the first country to adopt it as legal tender on Tuesday.
Both enthusiasts and detractors of cryptocurrencies will be monitoring the experiment to see if a significant number of people want to transact with Bitcoin when it circulates alongside the US dollar, and whether it brings any benefits to the Central American nation.
The country bought 400 Bitcoins ahead of the rollout, with a market value of about $20 million at current prices. It plans to buy “a lot more” of them, President Nayib Bukele said on Twitter, after buying the first batch of 200 Bitcoins.
If the experiment is a success, other countries may follow El Salvador’s lead. Its adoption will get an initial boost from the government’s Bitcoin wallet Chivo, which comes pre-loaded with $30 worth of the currency for users who register with a Salvadoran national ID number.
Businesses will be required to accept Bitcoin in exchange for goods and services, and the government will accept it for tax payments. The plan is the brainchild of El Salvador’s 40-year old president, who says it will draw more people into the financial system and make it cheaper to send remittances.
“This is brave new world stuff,” said Garrick Hileman, head of research at the Miami-based Blockchain.com. “We are in unchartered waters with this launch, but I’m glad to see this experiment happen overall, and I think we’ll learn a lot from it.”
Mr Bukele’s administration has installed 200 Bitcoin ATMs around the country that can be used to exchange the cryptocurrency for US dollars. The Finance Ministry created a $150m fund at state-run bank Banco de Desarrollo de la Republica de El Salvador, Bandesal, to back the transactions.
The dollar will remain the national currency for public accounting purposes and merchants who are technologically unable to receive the digital currency will be exempt from the law, the government said.
El Salvador’s dollarised economy is heavily reliant on remittances sent home by migrants overseas, which totalled $6 billion last year and account for roughly a fifth of the country's gross domestic product. Mr Bukele said Bitcoin could save Salvadorans $400m a year in fees for these transactions.
While Mr Bukele himself enjoys approval ratings of more than 80 per cent, a poll last week by El Salvador’s Universidad Centroamericana Jose Simeon Canas found his Bitcoin law is widely unpopular. Two-thirds of respondents said the law should be repealed, while more than 70 per cent said they prefer to use US dollars instead.
The International Monetary Fund has highlighted the risks of using Bitcoin, which lost nearly half its value from April to May, and the World Bank declined a request from El Salvador to help the government adopt it, citing environmental and transparency drawbacks. The Bitcoin news also helped trigger a selloff of El Salvador’s dollar bonds, although they have since pared losses.
“Crypto is sexy but untested and complicated especially for a country like El Salvador,” Nathalie Marshik, managing director at Stifel Nicolaus, said. “It’s extremely risky, and there is the question of, is the Bandesal fund big enough? The regulations look like the law, put together really quickly. It’s a big question mark.”
While the Bahamas launched its own central bank-backed digital currency this year, the Sand Dollar, and Venezuela has its own e-money called the Petro, these are very different from a decentralised cryptocurrency such as Bitcoin, whose users value its independence from governments and central banks.
Other governments in the region will be watching closely. Last month, Cuba moved to legalise cryptocurrency already being used on the island, while politicians in other countries such as Panama and Uruguay have proposed similar legislation.