On El Salvador’s crypto debut, the bitcoin price dropped by 17 percent
Cryptocurrencies continue to remain a gray area for many countries because of the sector’s lack of regulatory clarity. However, El Salvador President Nayib Bukele has taken a blind leap of faith by adopting Bitcoin as a legal currency. El Salvador has now become the world’s first country to officially adopt bitcoin as legal tender.
The plan headed by the President aims at helping the citizens of El Salvador save US$400 million per year in remittance fees (levied by banks & financial institutions). The move will also give the citizens with no bank accounts access to financial services. Last month, the country also installed Bitcoin ATMs as a part of its Bitcoin adoption plan. The ATMs will enable its citizens to convert the cryptocurrency into US dollars and withdraw it in cash form.
To further boost cryptocurrency usage, the government has promised each Salvadoran US$30 worth of Bitcoin by downloading the government’s Bitcoin wallet Chivo. A glitch plagued the Chivo app’s debut on Tuesday because it was unavailable for downloads on various app stores by Apple, Google and Huawei. Bukele later explained that the digital wallet was pulled offline to increase the capacity of the servers. He encouraged the citizens to download the app and leave comments on how it works.
A rocky start
On day one of El Salvador’s cryptocurrency foray, the Bitcoin price dropped by 17 percent to US$43,119, reaching its lowest in September. The crash seemed to have followed after El Salvador bought a total of 400 Bitcoins. However, the price crash didn’t stop Bukele from going all out in the crypto market. On Tuesday, Bukele purchased an additional 150 Bitcoins at a lower price, bringing the total to 550 bitcoins. He tweeted, “150 new coins added #BitcoinDay”. He further added a sarcastic tweet to thank the International Monetary Fund (IMF) for helping the Central American nation “save a million in printed paper.”
A stamp of disapproval
The IMF and World Bank have already flagged concern about cryptocurrency adoption because of its non-transparent, volatile and unpredictable nature. In a blog, the IMF has warned countries against adopting cryptocurrency as legal tender. The blog states that cryptoassets come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment as a national currency. See What Are The Laws Around Cryptocurrency? for more on legal uncertainties for regulating cryptocurrency.
“The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability. If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities,” said IMF in the blog. The IMF also added that adopting crypto would expose to exchange rate risk if taxes were quoted in advance, while expenditures remained mostly in the local currency, or vice versa.
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