EEl Salvador is the smallest country in Central America, smaller than the Commonwealth of Massachusetts, and yet it has just done something very big. This week, it became the first country in the world to adopt Bitcoin as legal tender, marking a turning point for cryptocurrency.

It could also potentially be a turning point for El Salvador and its citizens, 70% of whom are unbanked. Anyone with a cell phone can be their own bank when you add Bitcoin, and luckily for El Salvador, mobile penetration is unusually high for such a low income country.

Under the new law – which was proposed by President Nayib Bukele on Saturday night, towards the end of the 2021 Bitcoin conference in Miami – the US dollar will continue to be El Salvador’s currency, but all businesses will now have to accept payments in Bitcoin unless they don’t have the technology to do so.

A common refrain at Bitcoin 2021 was that Bitcoin ‘fixes everything’. While no one thought about El Salvador, they might as well have it.

Money is a trash can

Besides acting as a store of value – a type of digital gold, as some have called it – Bitcoin exists entirely outside the traditional banking system. El Salvador’s central bank cannot “print” more Bitcoin; neither can his government prevent a transaction from happening.

It is then easy to understand why some authoritarian governments have decided to ban or severely restrict Bitcoin, led by China.

It’s also easy to see why people in poorly managed countries have had no choice but to use Bitcoin to get by. Venezuela, for example, has one of the the world’s highest Bitcoin adoption rates because hyperinflation destroyed its currency, the bolivar.

The point was well made: money is a garbage can. If a substantial portion of your household’s wealth is in the bank, you are taking a huge risk.At Bitcoin 2021, someone carried a dumpster full of thousands of 50 bolivar bills, many of which ended up scattered across the conference grounds like so much rubbish. It was shocking to see the participants completely ignoring the paper money right under their feet as they walked from panel to panel.

An unprecedented global experience

You might think that hyperinflation and currency depreciation are things that only happen in third world countries, but there is no reason why it should not happen here in the United States. , as unlikely as it is.

Since 1971, when President Richard Nixon officially killed the gold standard, the US dollar has been a fully floating fiat currency backed by nothing. There is no limit to how much money can be created. The same goes for almost every other currency in the world.

I don’t think enough people appreciate the fact that this is a never-before-seen global monetary experiment in history. All other attempts to use paper money in the past have ended in disaster.

Take a look at the table below. Nearly $ 5,000 billion has been injected into the US economy since January 2020 in response to the pandemic. This represents almost 25% of all US dollars in circulation. In just a year and a half, the greenback has practically lost a quarter of its value.


Click to enlarge

Money has also been created – and diluted – thanks to the uncontrollable bond buying programs of central banks. At the end of May, the four largest central banks held $ 29.3 trillion on their balance sheets.

Total assets of major central banks at $ 29.3 trillion
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To borrow the line above, Bitcoin corrects this. The supply is capped at 21 million pieces. Once the last Bitcoin is mined, in 2140, there will be no more. No central banker or finance minister can flip a switch and dilute the supply by creating additional Bitcoins. Like any asset, Bitcoin has its own risks, but bad monetary policy is not one of them.

I hope financial freedom for El Salvador’s 6.5 million people was a priority when President Bukele chose to continue adopting Bitcoin. His administration has a history of corruption, and some Salvadorans would question whether the cryptocurrency will be used as just another tool for political gain and personal enrichment.

So what’s the next step?

El Salvador may be the first to adopt Bitcoin, but I don’t believe for a second that it will be the last. Politicians from other Latin American countries, including Paraguay, Panama and Brazil, have already expressed their support for the legalization of cryptocurrency.

For now, El Salvador is about to start mining its own Bitcoin. President Bukele on Wednesday said he instructed the chairman of LaGeo, the country’s geothermal power company, to “put in place a plan to offer facilities for Bitcoin mining with very cheap energy, 100% clean, 100% renewable, without energy emissions from our volcanoes. “

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How cool is that? Bitcoin powered by a volcano.

It goes without saying that all eyes will be on El Salvador in the future. Many Bitcoiners are no doubt hoping to see price appreciation as a result of President Bukele’s move, but I’m more curious to see what Bitcoin can do for El Salvador’s economy.

Originally published by US funds, 10/6/21


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M2 is a measure of money supply that includes cash, check deposits, and readily convertible near money.

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