Last week, El Salvador’s government passed a law to accept bitcoin as legal tender alongside the US dollar. The country receives $6 billion in remittances per year—nearly a quarter of its gross domestic product—and the hope is that bitcoin’s lower transaction costs could boost that amount by a few percentage points.
The move was first proposed by the country’s president, Nayib Bukele, who said he hoped that in addition to facilitating lower remittance fees, the bitcoin plan would attract investment and provide an avenue for savings for residents, about 70 percent of whom are unbanked. (What Bukele didn’t say, but what Bloomberg has reported, is that he and members of his political party have owned bitcoin for years.)
Adding the cryptocurrency to the roster isn’t a simple task, though, and the new law gives the country just three months to roll the plan out nationwide. No country has ever used bitcoin or any other cryptocurrency as legal tender, and challenges abound. To address those concerns, El Salvador turned to the World Bank and the International Monetary Fund for assistance; the latter is currently considering a $1.3 billion financing request from the country.
The IMF offered a guarded assessment of El Salvador’s bitcoin move, with spokesperson Gerry Rice saying at a press briefing, “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial, and legal issues that require very careful analysis.”
The World Bank was less generous. “We are committed to helping El Salvador in numerous ways, including for currency transparency and regulatory processes,” a World Bank spokesperson told Reuters. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.”
In other words, bitcoin’s energy demands and its ease of use in money laundering, tax evasion, and other illegal schemes makes the cryptocurrency a no-go in the eyes of the World Bank.
There are other reasons the World Bank and the IMF may be skeptical of El Salvador’s bid to use bitcoin. The technical challenges aren’t insignificant. For one, bitcoin’s price relative to the dollar has been highly volatile. How do you price a dozen eggs in bitcoin if the price of bitcoin fluctuates 10 percent in a few hours? Perhaps the answer is that you don’t. In the “Bitcoin Beach” of El Zonte, El Salvador, where bitcoin use is relatively widespread, merchants still price their goods in dollars, and the exchange rate is set at the time of purchase. That approach appears to be what the El Salvadoran government is taking, but it treats bitcoin more as a token than a true currency.
Second, bitcoin transactions can be notoriously slow. Each must be verified by miners, and miners only process blocks of transactions, not individual ones. So for a purchase in bitcoin to be confirmed, both parties have to wait for the block to be completed. Currently, one block takes about 10 minutes to be added to the blockchain, though in El Zonte, one merchant said transactions are confirmed in her local app in about two minutes. Various projects are working to improve the transaction speed, but they’re not part of bitcoin proper yet.
Lastly, while bitcoin transactions could be inexpensive or even free, they do tend to have a fee attached to them. Fees aren’t required, but they do entice miners to verify a transaction. Plus, should Salvadorans want to exchange their bitcoin for dollars, there are charges associated with that, too. So while the move could save on remittance fees, which run about 3 percent, the system won’t be costless.
El Salvador could still pull off the move without help from the World Bank or the IMF, but it will be that much more challenging. And the clock is ticking. Unless businesses don’t have access to the technology required, they’ll have to accept bitcoin by September 7, 2021.