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El Salvador Officially Adopts Bitcoin. Sound Economics Or Populist Grandstanding?

NayibBukeleJune2021.jpeg
Salvador Melendez
/
AP
Salvadoran President Nayib Bukele at his annual address to the Congress in June.

This week El Salvador becomes the first country to accept Bitcoin as legal tender. President Nayib Bukele insists it'll be a boon; critics call it an authoritarian diversion.

Starting Tuesday, El Salvador officially becomes the world’s first country to accept Bitcoin as legal tender. But it’s far from certain whether the cryptocurrency move is sound economics or grandstanding by a populist president.

Back in June, Salvadoran President Nayib Bukele announced — in a video message to the 2021 Bitcoin Conference gathering in Miami —that El Salvador's Congress had passed a bill to adopt Bitcoin. Promoters of the cryptocurrency — or digital currency — which is increasingly popular in Latin America, say it will democratize money the way the internet democratized information.

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El Salvador's Bitcoin law goes into effect this week. That means all Salvadoran businesses will now have to accept the cryptocurrency along with the country’s other currency, the U.S. dollar.

Bukele insists that using Bitcoin will help make El Salvador less vulnerable to shifts in the dollar’s value and create more "financial inclusion," since 70% of Salvadorans do not have bank accounts. He argues it will also help reduce the heavy cash transfer fees Salvadorans pay when sending money home from abroad — remittances account for a fifth of El Salvador's gross domestic product.

But skeptics point to the much more erratic volatility of Bitcoin’s value — and to the real uncertainty of whether enough Salvadorans will opt into cryptocurrency to make the project viable. Bitcoin enthusiasts on social media are also apparently buying more of the cryptocurrency this week, in a "price pump" to encourage Salvadorans to come onboard.

And Bukele critics suggest his crypto-gambit is simply a way to detract attention from his authoritarian governance.

Bukele, for example, recently had the legislature he controls replace the country’s Supreme Court with justices more loyal to him. On Sunday, the new court then overruled El Salvador’s constitution and said Bukele may run for a second consecutive term in 2024. The U.S. strongly criticized the move.

Either way, starting this week, Salvadorans will be able to use a Bitcoin app called Chivo to exchange dollars for cryptocurrency at special Bitcoin ATMs.