What to Make of El Salvador’s Move to Adopt Bitcoin as Legal Tender

El Salvador's Stunted Economic Growth

El Salvador’s economic growth has stalled for decades. According to the World Bank, the country’s annual GDP growth has stagnated at an average of 2.3% for nearly 20 years.

In 2001, the South American nation replaced the Salvadoran colón with the US dollar to counter rising inflation against stunted economic growth. Things were relatively normal until the coronavirus pandemic hit the globe in 2019 — and the US treasury pumped more dollars into their economy. However, the move’s effects were not felt by El Salvador or any other country relying on the US dollar.

Thanks to more money released into circulation, the value of the dollar fell, but its supply within the Salvadoran economy remained the same. This significantly impacted Salvadorans’ purchasing power with the US dollar — which is a familiar problem among developing countries that favour the use of the USD over their own national currency.

These events probably pushed El Salvador’s government to want to adopt Bitcoin to assert the country’s economic sovereignty. Unlike other currencies controlled by governments, Bitcoin plays to its own tune. With Bitcoin, El Salvador can assert it’s economic sovereignty. Events happening thousands of miles away no longer have to affect the financial willpower of citizens.

The Beginning of Hyperbitcoinization

Hyperbitcoinization is a phenomenon in which the world transitions from fiat to a more publicly-driven currency. In such an event, Bitcoin would become the default value system on the globe. Such a transition would feature Bitcoin-induced demonetization, where Bitcoin gains so much popularity that it edges out traditional currencies.

In 2018, Venezuela ditched the dollar in favor of the petro (₽), the country’s central bank-issued cryptocurrency. This move was president Nicolas Maduro’s way of eroding the power of US sanctions against the country.

But even before Venezuelan officials approved the use of the petro, Bitcoin and other cryptocurrencies already held sway in the country. You could even pay some uptown street vendors with digital coins from as early as 2019.

It seems as though Paraguay is also considering formally recognizing Bitcoin and cryptocurrencies. Lawmaker Carlos Rejala has indicated an interest in making Paraguay “a crypto-friendly country” by creating a friendly regulatory environment. Rejala has said he’s pushing a bill to regulate digital assets in the country. These plans include legislating crypto as a medium of exchange.

This initiative will be bolstered by the American University of Paraguay’s move to accept crypto payments as of August 1, according to a tweet by the institution. It’s a sign that the country is ripe for a Bitcoin-based financial system.

Hyperbitcoinization would not happen abruptly. More likely, it would be a “gradually, then suddenly” event. And while it’s a hypothesis, its manifestation would begin with far flung and unexpected countries taking the first step towards formally adopting the pioneer cryptocurrency.

What This Means for El Salvador and Bitcoin

Making Bitcoin El Salvador’s national currency will send shock ripples through the country’s financial ecosystem. The central bank, the country’s revenue agency, vendors, merchants and citizens alike will inevitably have to prepare themselves for this technological paradigm shift.

Bukele’s administration believes adopting Bitcoin will open new job opportunities and promote financial inclusion for thousands of citizens excluded from the economic setup.

El Salvador’s move could also see its citizens’ financial fortunes reversed for the better. When Salvadorans widely ditch the dollar for Bitcoin, HODLers will likely find that it is the most lucrative crypto investment that ever came their way. The government is already gifting $30 worth of Bitcoin to every Salvadoran who installs the government’s crypto app.

Also, the adoption of Bitcoin in the country could trigger a domino effect among neighboring nations that are also struggling with unstable local currencies. El Salvador’s leap could inspire other countries to do the same. The move also legitimizes Bitcoin in front of the world. While countries like China are shutting down crypto, others are diving in head first.

Getting Out From The Dollar Thumb

Dollarization — which is the partial or full replacement of a country’s national currency with the US dollar was widespread in Latin America in the 1970s. Hyperinflation among these countries rendered their domestic currencies nearly worthless and the USD looked like the only stable alternative store of value.

Despite much faith placed on the dollar, it didn’t really live up to its expectations. Over the decades, economic policies by the US treasury resulted in a deteriorating financial outlook for economies that pegged their currencies to the dollar.

Latin America has plenty of motivation for adopting Bitcoin. Countering inflation, promoting financial inclusion, stirring technology investments, and even FOMO are reasons why El Salvador’s counterparts are likely to follow lead. However, cutting down reliance on the dollar is a common uniting factor.

Take the case of Paraguay. The emerging push for developing a legislative framework for digital assets is a direct result of El Salvador’s Bitcoin adoption. Although the country does not use the USD, heavy trade between the two countries means Paraguay is indirectly tied to US’ fiscal policies.

Other neighboring countries seem to be taking a hint. Panamanian politician Gabriel Silva responded to president Bukele’s tweet, saying that they are preparing a similar proposal for their national assembly.

Mexico Senator Indira Kempis added laser eyes to her Twitter profile to show her support for Bitcoin in response to El Salvador’s move. Such was also the response from the Argentinian National Deputy for Neuquén Francisco Sanchez and Brazil’s State Deputy for Rio Grande do Sul Fabio Ostermann.

A common thread among all these countries is their heavy dependence on the US dollar and the fact that they cannot wait to get out from under its thumb.

Final Thoughts

El Salvador goes down in history as the first country in the world to make Bitcoin legal tender. This is a massive rubber stamp for Bitcoin and cryptocurrencies, which many people still think of as a far-fetched, impractical technology.

The country’s move is also likely to inspire other countries to jump on the bandwagon, which will only solidify Bitcoin’s place in the financial world.