Today, Salvadoran President Nayib Bukele released a video via the Bitcoin 2021 Miami conference claiming to submit a bill to make Bitcoin legal tender (Legal Tender) in the country, followed by a pro-Bitcoin message on Twitter and the addition of his Twitter avatar with the popular “laser eyes” of the cryptocurrency community.
The news made headlines, but I’m sure the first question on most people’s minds was, “There’s this country? Where is it?”
According to Wikipedia, El Salvador is located in northern Central America and has an area of 21,041 square kilometers, slightly smaller than Nanning, China (22,099 square kilometers), El Salvador has a population of 6,344,700, slightly less than Nanning (7,254,100), and El Salvador’s GDP per capita is $4,000, less than half of Nanning’s ($8,918).
The idea of El Salvador wanting to use bitcoin as a fiat currency may be bold, but it is largely impossible to achieve in concrete terms.
1 Natural Technical Limitations
In recent years, the Bitcoin network has been congested, and it has reached its upper limit in terms of its ability to handle on-chain transactions. According to bitinfocharts, in the last 24 hours, the BTC network processed 181,006 transactions, and El Salvador has a total population of over six million people, meaning that the current Bitcoin network, even for just one country, is not enough for Salvadorans to send an average of one transaction per month. This is clearly not enough capacity for a fiat currency to handle daily needs.
BTC’s scaling solution is the Lightning Network, but it has been in development for several years and has been used by very few people so far. Moreover, using the Lightning Network also requires sending bitcoins to the Lightning Network in the form of on-chain transactions, and the current Bitcoin network is unable to meet the top-up needs of even one country, El Salvador. There is also the issue of recharge fees, as El Salvador ranks 111th in the world in terms of GDP per capita, with 29.2% of the population being poor (less than $5.50 in disposable income per day), and transaction fees can easily run into the tens of dollars at a time when the Bitcoin network is congested, making it clearly unaffordable for most Salvadorans.
Back in April of this year, a Twitter user named @rip44614726 tweeted a complaint to Phoenix Wallet, a lightning network wallet, that he was receiving alerts that the Bitcoin network’s memory pool was full and that fees were too high to accept transfers for the time being. Such a network is clearly not stable enough for a fiat currency.
2 The Economic Problem
In the case of fiat currencies, they are made legal tender by state decree, which no one can deny, but at the same time, the state has a corresponding obligation to maintain the stability of the currency. When a currency is not stable enough, people tend not to use it, even if it is the country’s fiat currency.
When the currency is facing huge inflation, people tend to spend the soon to be devalued currency as soon as possible and no businessman is willing to accept it, as happened in Zimbabwe in previous years or in the Republican era decades ago. In such cases, people tend to abandon fiat money in favor of more stable “currencies” such as dollars or rice.
When a currency is facing huge deflation, the tendency is to keep the currency unspent, and a currency that has lost its meaning in circulation is not considered fiat money. This has rarely happened in human history; after all, most currencies are inflationary in the long run. But in the history of Bitcoin, it has happened from time to time, the most obvious example being the programmer who spent 10,000 Bitcoins on two pizzas.
The big obstacle to Bitcoin becoming legal tender is also its huge volatility. Imagine a pizzeria in El Salvador pricing its pizzas in Bitcoin, the “legal tender,” would it need to change prices every day? Could a company pay its employees in bitcoin as a salary, and could it pay a fixed amount every month despite the huge fluctuations in the value of bitcoin? If the currency cannot be used to price everyday goods or services, then it clearly cannot be a legal tender.
At best, El Salvador could implement a scenario where it would price goods in a stable currency such as the US dollar and settle in Bitcoin, as Tesla has done before by accepting Bitcoin. However, in this case, the actual fiat currency would be the U.S. dollar, with a bitcoin veneer.
3 The Real Intentions of President El Salvador
For a politician, it is the prestige that matters, whether or not they can achieve their agenda is another matter. Attempts to push bitcoin as a fiat currency are not new in the political sphere, as Iceland’s “Pirate Party” tried to push bitcoin as the country’s fiat currency back in 2016, according to Time magazine. In the future, whether or not Bitcoin becomes the fiat currency of El Salvador, overnight, the small Central American country of El Salvador, along with its president, has become at least as well known in the cryptocurrency world, and from an exposure standpoint, the president’s goal has been achieved.
As for the news that a village in El Salvador should start a bitcoin economy, the truth is that a donor found a forgotten flash drive with bitcoins on it and donated hundreds of thousands of dollars a year to the village to build a “bitcoin beach”. The total number of people in the village is only 3,000. That means the landing was based solely on donations, not rational considerations. So perhaps the president’s announcement is somehow a way to get more donations.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/el-salvador-becomes-first-country-to-use-bitcoin-as-fiat-currency-just-a-marketing-gimmick-or-a-way-to-garner-donations/
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