El Salvador’s Risky Legal Tender Leap Into Bitcoin 

El Salvador, Bitcoin, rally, cryptocurrency

In for a penny, in for a pound, as they say. Or: In for bitcoin – and not just for a bit.

Bitcoin is trading, at this writing, at near $51,000, shy of its all-time high of more than $63,000, but well off recent lows when it threatened to remain below $30,000.

That wide range and wild ride gives some sense of the dangers of relying on crypto as a unit of commerce – particularly when the underlying economic backdrop is volatile as well.

And yet El Salvador has taken the plunge toward making bitcoin a national currency, the first nation in the world to do so.  As reported, the country bought $21 million of bitcoin, arguably the most visible name in cryptocurrency.

See more: El Salvador Buys $21M Bitcoin as It Marks Crypto’s Cash Debut 

Tweets from the country’s president detailed that El Salvador will seek to buy “a lot more” bitcoin moving ahead. And as has been well-documented, the digital offerings stand as legal tender – right alongside the U.S. dollar, which is the nation’s currency.

Making the Leap  

In making the leap to bitcoin – and holding the crypto in reserve and on the balance sheet – El Salvador is taking a gamble that its population will want to use bitcoin for everyday commerce in the first place. That seems a bit unlikely, as polls have shown that a majority of individuals surveyed are anti-bitcoin in that country.

Let’s say the bitcoin, hypothetically speaking, just kind of “sits” there on the balance sheet. Swings in the pricing – as wild as the ones mentioned above – could conceivably have an impact on the economy at large. Using bitcoin as a lure for foreign investments is clearly a goal here, too. Foreigners who invest three bitcoin into the country will be granted residency in El Salvador.

El Salvador’s GDP is about $27 billion, per World Bank Data – so it’s easy to see that as bitcoin remains volatile, a ripple effect can materialize. It could go either way. Merchants must accept the crypto as they sell goods and services; if bitcoin does indeed gain traction, might we assume that commerce gets ramped up? To help goose the process a bit, the “Chivo wallet” is being rolled out, via government app, and $30 of bitcoin will be delivered to those wallets.

And here’s the rub, in a way. Once that bitcoin gets delivered to the wallet – let’s say, for a government or social service benefit – and it ping pongs around, who’s to say what it’s really worth? Today’s $30 of bitcoin may be worth $45 or $15 tomorrow. Proponents of bitcoin say that the crypto will be an effective means of sending remittances, which the World Bank estimates is roughly 20 percent of GDP.

Meanwhile, taxes represent a knotty problem – tax liabilities for merchants or consumers can vary widely depending on the ultimate pricing. Similarly, assuming that the El Salvadorian government would use bitcoin in its normal day-to-day expenditures, everything from public works to paying down debt obligations, it’s tough to know just what can be paid for – and with how much bitcoin.

El Salvador thus becomes a beacon for bitcoin – and the challenges that may lie ahead.