2 min read.Updated: 09 Sep 2021, 10:19 PM ISTLivemint
The rocky start to its adoption of this digital currency as legal tender that sent crypto prices crashing has highlighted the volatility risk of stores-of-value acting as means-of-exchange
El Salvador’s launch of Bitcoin as an official currency on 7 September was supposed to be a historic event in the evolution of cryptocurrency. Instead, it will go down as a clunky experiment that went into convulsions right at the onset. The Central American nation, known chiefly for its ideological strife during the Cold War, shot into the global limelight by becoming the world’s very first country to adopt Bitcoin as legal tender. But its state-backed Chivo wallet app, meant to enable the use of these digital tokens, wasn’t available on popular app stores. It took a tweet on Twitter by El Salvador’s President Nayib Bukele—his displeasure evident in an ‘angry’ emoji—for downloads to get going. Then, as a rush ensued, the app faltered and bug-fixers had to be called in. With social media abuzz with these twists, Bitcoin’s dollar value crashed (almost 20% at one point), taking other cryptos along. An El Salvadoran who had wired Bit-money home from the US would’ve seen that much less reach her family. Intimations of flux should have exposed the perils of this path. But El Salvador’s leader wasn’t to be deterred.
A defiant Bukele described the drop as an opportunity for “buying the dip" and aimed a sarcastic thank-you at the crypto-sceptic International Monetary Fund for saving El Salvador “a million in printed paper", even as his government bought 150 units of Bitcoin in a show of support. His pep talk sounded hollow, as app glitches persisted, but he may be right about a recovery at some point. The supply of Bitcoin is reputedly limited, after all, by its software design. This is also its chief attraction, for it cannot be debased by human folly—as the basic concept’s fans see it—through oversupply by central bankers. For a small country with a gross domestic product (GDP) of just $27 billion in 2019, running a currency of its own is bothersome. Indeed, small economies are frequently advised to simply peg their currencies to the US greenback. Many local residents were using US dollars or cryptos anyway, the latter because inward remittances, which add up to over 22% of its economy, were increasingly going crypto to save on the high wire-transfer charges of regular channels. By embracing an online currency that costs nothing to transfer across borders, El Salvador expects annual savings of $400 million on remittance fees. Financial inclusion via digital wallets was another goal: Chivo gets preloaded with $30 of Bitcoin every year by the state. This is a universal basic income, an idea all countries ought to explore.
The problem with El Salvador’s embrace of costless digital payments is its choice of instrument. Bitcoin won’t get cheapened by over-mining, but its limit on units also makes it a store-of-value rather than a good means-of- exchange. As its demand rises, so does its conversion value, and vice-versa; and thanks to speculation, high volatility is assured. This week’s was not too aberrative. Other risks lurk as well. Should China crack down on the carbon exhaust of Bitcoin mining, for example, crypto markets will get a rude shock. For transactional use, however, a currency’s stability is crucial. Unless El Salvador and its diaspora can clip fiat currency out of their lives, wide Bitcoin usage could cause price chaos and rattle its economy from time to time. It is not impossible for a country to run on a crypto, of course. Stablecoins might yet resolve instability as an issue. Central bank digital currencies hold promise in this context, too. El Salvador’s move was brave, but its debut stumble is unlikely to be its last.