Friday, January 21, 2022

What happened to the first country in the world to adopt Bitcoin and what it teaches us

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While El Salvador may have faced some challenges in adopting Bitcoin, the cryptocurrency’s future may yet be paved with gold

When El Salvador’s Congress approved President Nayib Bukele’s proposal to introduce cryptocurrency alongside the US dollar, it was heralded as a decision that would bring financial inclusion and investment.

Last fall, El Salvador became the first, and so far only, nation to adopt Bitcoin as a legal currency.

President Bukele said the introduction of bitcoin would also make it easier for people living abroad to send money home, and the $4 billion (£2.8 billion) they send back each year makes up 20 percent of gross domestic product (GDP ) of the country.

But the law was contingent on companies having the technology to process the transactions, and there was an added complication, El Salvador had asked the International Monetary Fund for a $1 billion loan; a request that was later denied.

Katharine Wooller, chief executive of crypto wealth platform Dacxi, said the launch was met with problems, the platform holding the bitcoin eventually crashed and a $30 incentive to create a bitcoin account didn’t go down well may be.

She said: “As with the introduction of the euro in Europe, it was not met with unreserved enthusiasm – in fact, some (mainly the older generation) in El Salvador felt compelled to take to the streets to protest the policy.”

In the weeks that followed, the decision seemed vindicated as Bitcoin rose from its value in the transition from $42,600 to an all-time high of $65,500 a few weeks later. She pointed out that the gain was short-lived and Bitcoin’s price has since corrected sharply to $43,700.

Despite teething problems, Ms. Wooller believes crypto has a future as a legal but decentralized financial asset, rather than a currency.

“Its volatility needs to be addressed, but right now many of those who hold bitcoin are doing so as a hedge against possible inflation and as such are using it more as a store of value, much like gold, rather than as a currency.”

Ms. Wooller believed that cryptocurrency regulation would emerge as many of the world’s central banks are in the process of producing their own version of a decentralized currency.

“While robust regulatory oversight is clearly needed to facilitate crypto’s interaction with traditional financial infrastructure, the appeal lies precisely in the fact that its decentralization makes it immune to government interference.”

She dismissed fears that a decentralized currency could destabilize economies. She said: “Those appalled that major economies are wantonly printing money are therefore highly motivated to buy legitimate cryptocurrencies that offer a huge potential market at the government and financial institution level.

“The technology itself is already causing a stir in economic policy, as the majority of the world’s central banks are considering digitizing their currency and pilot projects, such as in China, are already underway.”

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