El Salvador’s adoption of Bitcoin as national currency marked as a path that should not be followed

William Je, CEO of institutional investment firm Hamilton Investment Management, has claimed that El Salvador’s national adoption of Bitcoin as a legal tender should not be a model for the future, instead labelling it as an exception to the rule.

Since the introduction of cryptocurrencies in 2009 and its recent global surge in popularity, questions have been raised surrounding the feasibility of decentralised digital currencies as a suitable substitute for centrally controlled national currencies. In a world-first, El Salvador adopted Bitcoin as a legal tender in September of this year, however concerns have since been raised on the viability of this decision.

“Let’s remember that El Salvador is a developing economy and a nation with a history of currency changes,” said Je.

“In 2001, El Salvador replaced its then domestic currency, the colón, with the US dollar. Its adoption of bitcoin as legal tender is down to the same challenge the nation faced 20 years ago, which is that just under a quarter of the country’s GDP comes from remittances from its citizens who live and work abroad,” he said.

Remittance fees cost citizens over US$400 million each year and have been a leading cause as to why only 29% of El Salvador’s population has an active bank account. The transition to a digital currency system has allowed citizens to control funds from their smartphones, opening up a range of new financial services available to them.  

However, financial experts are warning against the future adoption of a nationless decentralised currency, explaining that due to the volatility of the digital market, cryptocurrency should not be seen as a stable means of legal tender.

“It’s highly unlikely that any major developed economy will follow El Salvador’s example and elevate a third-party cryptocurrency which their own central bank cannot control to legal tender status,” said Je.

Instead of following the path laid by El Salvador, approximately 89 central banks worldwide are exploring the possibility of launching their own Central Bank Digital Currencies (CBDC), according to the US think tank The Atlantic Council. China, the United States, Nigeria, the Bahamas, Indonesia and the United Kingdom are among the countries that have started taking strides towards the creation of their own CBDC.

“A national CBDC managed by a central bank would retain some of the perceived benefits of a cryptocurrency – such as simple transfers of large sums, doing away with physical cash, and an audit trail to crack down on corruption and tax evasion,” said Je.

“Central banks need to be clear on what they want to achieve by launching their own CBDC – what problems do they think they can solve and what new opportunities do they think they can create with a digital currency, which their existing policies and products cannot,” he said.