The Central American country is aiming to reduce the cost that Salvadorans pay for sending remittances.
Bitcoin is now a legal currency in El Salvador, paving the way for a new era in the Central American nation as the first in the world to adopt a cryptocurrency.
This Tuesday, September 7, the first national crypto market in this country formally began amid doubts and expectations from analysts and international organizations.
Within hours of the Salvadoran market opening, bitcoin reported a 10% drop that brought its value down to 42,900 dollars per cryptocoin.
The beginning of bitcoin in El Salvador started with the purchase of just over 400 bitcoins that will be introduced into the market as legal currency.
In order to do this, the government led by President Nayib Bukele established a first zone called “Bitcoin Beach” in the El Zonte region, a coastal and tourist region located on the Salvadoran Pacific coast.
In this town, businesses have started accepting bitcoin as a regular form of payment, although some residents still fear the volatility of the cryptocurrency.
Meanwhile, as a form of government support, the Bukele administration has already bought the first 400 bitcoins, equivalent to around 21 million dollars.
Additionally, it put into operation a small network of 200 ATMs that work with virtual wallets known as CHIVOs on mobile devices.
The Salvadoran government also gave citizens the equivalent of 30 dollars in bitcoin to get the legal market for this cryptocurrency started.
Alongside bitcoin, the US dollar is also legal currency in El Salvador, after a process of dollarization in this Central American nation.
Bitcoin’s progress in El Salvador is explained by the reduction in fees paid by Salvadorans abroad for sending remittances.
According to estimates by President Bukele, the use of bitcoin as a legal currency will allow Salvadorans abroad to save up to 400 million dollars.
Remittances are an important source of income for El Salvador and equate to just over 6 billion dollars annually, around 23% of this country’s Gross Domestic Product (GDP).
Although the argument for making savings on the payment of fees seems plausible, some financial analysts have expressed concern about the cryptocurrency’s considerable volatility.
The Salvadoran government’s main argument for promoting bitcoin in El Salvador has to do with sending remittances.
However, according to the Reuters news agency, Salvadorans abroad don’t actually trust bitcoin for sending remittances.
Additionally, the World Bank has said that the costs of sending remittances in this dollarized economy are already the lowest in the world.
All we need do is remember how Tesla owner Elon Musk influenced the value of bitcoin with a simple post on Twitter, when he confirmed that his electric vehicle company wouldn’t accept bitcoin as a form of payment.
Musk argued then that bitcoin mining has a considerable impact on the environment as it consumes large amounts of energy.
The words Musk wrote in this tweet sent the value of bitcoin tumbling and hundreds of cryptocurrency followers lost thousands, some even millions, of dollars.
Tesla & Bitcoin pic.twitter.com/YSswJmVZhP
— Elon Musk (@elonmusk) May 12, 2021
President Bukele’s ‘bitcoinization’ plan includes creating a trust of 150 million dollars to back conversion of the economy to this cryptocurrency.
However, international rating agencies aren’t as optimistic as Bukele, warning that bitcoin and other cryptocurrencies can lose thousands of dollars of value from one moment to the next.
Fitch Ratings believe that the change to a bitcoin market in El Salvador will be detrimental to insurance companies exposed to the risks of exchange markets.
The launch of bitcoin in El Salvador exposes another risk that has to do with the operational regulation of financial institutions.
For specialists, these risks correspond to compliance with international regulations against money laundering and terrorist financing.
For the rating agency Fitch Ratings, there is a risk that the bitcoin market in El Salvador will attract cryptocurrency flows from illicit activities.
For its part, Moody’s decided to lower the sovereign credit rating for El Salvador after the decision to launch the crypto market, which has put pressure on national bonds in this country.
(With information from Reuters and AFP)