El Salvador, the choice to adopt bitcoin could prove to be a painful shot in the foot


Since the bitcoin it has unnaturally coupled to the dollar as the legal tender in the delightful Central American republic of El Salvador, the comedy of misunderstandings around this cryptocurrency (and the thousands of imitations) has escalated to paroxysm.

On the stage perform in the usual pochade, characters suffering from substantial cognitive deficits, propalators of bizarre economic theories and cryptoevangelists of the webbe. They belong to a variegated milieu of pseudo libertarians, anti-everything anarchoids, veterans of Occupy Wall Street, hodler irreducible, foxes in search of chickens and simpleton aspiring to instant riches. All characterized by the same impediment to understanding what a coin is and how the financial system works out of their skulls.

In itself the fact that bitcoin is in progress legal in a country (moreover with a Lilliputian economic weight) it changes little, both for the prospects of the country and for those of the cryptocurrency. El Salvador could have chosen any more or less reliable currency instead of bitcoin, for example the euro, the Canadian dollar, the Kuwaiti dinar or the Korean won. For practical purposes, almost nothing would have changed.

Indeed, giving the opportunity to pay Salvadoran exports in bitcoin (or other means of payment convertible into dollars) it does not improve competitiveness on international markets, nor quality for consumers. Nor does it affect the productivity of the domestic economy which remains mainly based on subsistence agriculture.

In theory, the possibility of being able to freely spend large sums in bitcoin could attract those (both criminals and honest people) who hold large amounts of it, but cannot convert them into traditional currencies due to anti-money laundering regulations. However, if the circumvention of these rules acquired considerable dimensions, Salvadoran banks would in all likelihood end up on a global black list and consequently for them to operate in dollars would become an ordeal (just ask their Iranian colleagues). In short, the legal tender it would change in a painful blow to the foot. It is not surprising that international institutions, from the International Monetary Fund to the World Bank, are not enthusiastic about the measure.

For ordinary citizens, the main benefit is the roughly $ 30 that the government graciously gave everyone through an app called “Chivo” (slang that in Italian would vaguely sound like “cool”). This technological marvel should allow for fast and secure transactions in bitcoin, but at the moment it evokes our “Immune”. The funds to be distributed were withdrawn from the international reserves of the central bank which, to support the President, converted them from dollars into bitcoin. If the government had distributed the equivalent in Canadian dollars or Korean won, citizens would have gotten the same benefit in real terms (perhaps even greater since those currencies are more stable).

But according to the nice President of the Central American country, with the exotic name of Nayib Bukele (which feeds Chavez-like instincts), the legal tender of bitcoin on home soil would bring two magnificent evolutions:

1) International entrepreneurs would be induced to invest in El Salvador. It is not clear why, given that the economy has been completely dollarized for decades (with no shadow of American investors in sight) and therefore the stability of the exchange rate is not a problem. So if El Salvador does not attract investments it is certainly not for reasons related to monetary policy;

2) The transfer of remittances of emigrants (a quarter of the population) would become easier and cheaper. Also in this area there are alternative and effective methods as anyone who uses a normal credit card knows. And if the poor campesinos they do not have bank accounts, there are multiple solutions to solve the problem, which I do not mention to avoid free advertising.


It is no coincidence that polls reveal that two thirds of citizens they oppose to the introduction of cryptocurrency. The only conceivable reason for assigning bitcoin the status of legal tender it concerns the possibility for the Salvadoran central bank to set a nominal interest rate on bitcoin loans. And here we get to the heart of the matter.

What would be the appropriate interest rate for bitcoin? 10%, 5%, 1%, 50%? Or maybe it should be negative, for example -2.5%? Nobody can tell for a self-evident reason: the value of bitcoin compared to traditional currencies is impossible to predict. Therefore, those who obtain the loan and those who grant it make a bet on the appreciation or depreciation of bitcoin of such an extent as to make the interest rate a secondary or even negligible aspect. Those who take out a ten-year bitcoin mortgage have no way foresee if in the coming months the bitcoin will be worth 100 thousand, 10 thousand or maybe a million dollars. Or maybe in 5 years it will have disappeared, supplanted by something else.

To ensure that the revolution that ferves believers really originates from bitcoins, at least one of two conditions must be met.

1) It is born a parallel economy which works mostly in bitcoin, meaning that companies pay for commodities, employees, taxes and almost all expenses in bitcoin. That employees in turn pay for rent, food, clothing, electricity, water, transport, etc. in bitcoin. In short, a virtual economy (not delimited by geographical borders) that determines the value of bitcoin as a function of “exports”, “imports” and capital movements towards the traditional economy based on fiat currencies;

2) The value of the bitcoin is pegged in a credible way to that of a commodity or service of mass consumption (oil, kilowatt hours, data transfer giga, gold).

At the moment neither of the two hypotheses appears credible. The legal tender of bitcoin in El Salvador has solved only one problem: you can pay taxes with Chivo. For those who do not earn in bitcoins it is exactly like paying them in Kuwaiti dinars at the exchange rate established by the market. And among other things, it is absolutely not certain that this is a positive aspect. Indeed, Moody’s has downgraded Salvadoran sovereign debt because bitcoin tax revenues are too volatile and therefore the public deficit becomes the equivalent of a roll of the dice in Las Vegas.

In short, adding bitcoin to the dollar like legal tender in El Salvador it appears as a propaganda move to bolster the popularity of a president who is not alien to authoritarian tendencies. When you scratch some patina from the fole on the blockchain and on the anarcho-libertarian nirvana you end up finding the Caudillo 2.0.


Leave a Comment