Despite many controversies, the Salvadoran government insisted on its previous decision: to use Bitcoin as a national legal tender.
Three months ago, the National Assembly of El Salvador passed the Bitcoin bill submitted by the President of El Salvador, Nayib Bukele, by an absolute majority.
On September 7, the bill came into effect. As a result, El Salvador became the first country in the world to adopt Bitcoin as its legal tender.
But the first person to eat crabs may be a brave person, but not necessarily a person who can eat crabs well.
In fact, on the first day that Bitcoin officially became a local legal currency, El Salvador experienced a market crash, wallet failure, domestic protests…
Is El Salvador really ready for this historic financial experiment? In the carnival of cryptocurrency supporters, can Bitcoin really become the “gravedigger” of the US dollar?
Image source: Twitter
Bitcoin is becoming the PayPal and Alipay of El Salvador
“I just walked into a McDonald’s in San Salvador to see if I can pay for breakfast with Bitcoin. To be honest, I totally wish to be told that I can’t.”
On the morning of September 7, local time, Bitcoin officially became the first day of Salvadoran legal tender. Reporter Aaron van Wirdum came to a McDonald’s restaurant in El Salvador. He wanted to test whether Bitcoin payments could be made here.
“But look, they printed the ticket and QR, took me to the web page and the lightning invoice, and now I am enjoying the traditional De Sajuno that I like!”
The final result is that Aaron van Wirdum used Bitcoin to buy his favorite breakfast smoothly.
As Bitcoin becomes the legal tender of El Salvador, the list of companies accepting Bitcoin payments in the local area is also increasing.
In addition to McDonald’s, the two internationally renowned chain restaurant brands, Starbucks and Pizza Hut, are also allowed to use Bitcoin to pay in their local stores.
Phoenix.com “Eye of the Storm” learned that, with the strong encouragement of the government of Saskatchewan, even some small local grocery stores on the streets and alleys have begun to accept Bitcoin as payment. Judging from the bitcoin payment QR code address posted outside the store, the user experience is probably similar to our domestic Alipay and WeChat.
Since the passage of the Bitcoin Act in June this year, El Salvador has taken many measures to promote and popularize the use of Bitcoin in the local area.
At present, the Salvadoran government is installing more than 200 ATMs with bitcoin exchange functions, which can convert bitcoins in personal digital wallets into U.S. dollars and then withdraw them without paying a handling fee.
A Bitcoin ATM in El Salvador (Image source: Twitter)
In addition, President Nayib Bukele and the ruling party are still sparing no effort to promote Chivo wallets. Chivo Wallet is the official Bitcoin and U.S. dollar wallet of the government of El Salvador.
Phoenix.com “Eye of the Storm” learned that Chivo Wallet is compatible with other Bitcoin chain wallets and Lightning Wallets, allowing users to send and receive Bitcoin and/or U.S. dollars between Salvadorans without commissions, allowing users to transfer Bitcoin Currency is exchanged for USD and vice versa, no commission is required.
In addition, Chivo is connected to the El Salvador banking system to deposit or withdraw U.S. dollars on the platform, and connects to the Chivo ATM network to deposit and withdraw U.S. dollars in cash. Chivo also has a corporate version that allows corporate users to quickly and easily charge fees, assign payment terminals to employees, and pay taxes.
Ibrahim Bukele (Nayib Bukele) previously stated that the Chivo wallet is not mandatory for the public, and it supports the use of Salvadorans living abroad.
In order to encourage people to use Bitcoin, President Bukele also announced that the government will spend 120 million U.S. dollars to distribute up to 4 million people who have registered to use Chivo Bitcoin wallets, each with a “virtual currency red envelope” worth 30 U.S. dollars.
Embarrassing “Bitcoin Day”: flash crashes, malfunctions, protests…
It seems that Bitcoin has brought a whole new look to this “small country” in Central America. But the other side of the matter may not be as “beautiful” as it seems.
In fact, it was September 7th, “Bitcoin Day” in El Salvador. First, the state-backed cryptocurrency sending and receiving wallet Chivo suffered a technical failure, and then caught up with the sudden 14% drop of Bitcoin, and there were protests outside the country’s Supreme Court…
On September 6, President Nayib Bukele tweeted, excitedly looking forward to the upcoming “Bitcoin Day”: “Tomorrow, for the first time in history, the whole world will focus on El Salvador.”
At the same time, Nayib Bukele also revealed through social platforms that the government bought 400 BTC in two installments on the same day . Calculated according to the price of BTC 51690 USD at 18:00 on the 6th, the value of this 400 BTC is approximately USD 20.67 million.
After the announcement, the price of Bitcoin soared all the way to $52,681.85, the highest level since May. But the good times didn’t last long, and Bitcoin had a flash crash.
On the afternoon of September 7, the price of Bitcoin quickly fell to a low of US$42,830, a drop of more than US$7,000, with an intraday drop of 18.73%. The value of BTC held by the Salvadoran government instantly shrank by more than US$3.4 million.
Data source: CoinMarketCap
The famous Bitcoin bearer economist Peter Schiff made a mockery of Bitcoin and El Salvador. He wrote on Twitter: “El Salvador, welcome to the world of Bitcoin. Your fiat currency has lost more than 15% of its purchasing power within an hour. Just get used to it. This is just another sharp rise and fall of Bitcoin whales orchestrated. This is too bad, this time they have to sacrifice a country to achieve it!”
Before the “Bitcoin Day” in El Salvador, the Chivo Wallet, a cryptocurrency wallet supported by the State of El Salvador, began to be installed and used in various media channels in El Salvador. There are related tutorials in the salvadoran daily newspaper and the obvious position of the newspaper network. And note that the wallet can be downloaded in the Apple App Store, Google App Store and Huawei App Store.
But before the Bitcoin crash, Chivo had a technical failure. The Chivo Wallet was launched in the early morning of the same day to provide local users with free Bitcoin worth $30, but the connection was disconnected after 5 hours due to insufficient server capacity.
On the day of “Bitcoin Day” in El Salvador, President Ibrahim Bukler tweeted 49 tweets on a special tweet, more than any other day in the past, which shows how much he attaches importance to this matter. Despite the enthusiasm of Mr. President, some people do not seem to buy it.
On the afternoon of September 7, local time, more than 1,000 people participated in a protest in the capital San Salvador. They burned tires and set off fireworks outside the Supreme Court to oppose the country’s adoption of Bitcoin.
Protesters interviewed by Reuters stated that “this currency is very suitable for large investors who want to speculate with their own economic resources.” But he believes that this “currency” is not suitable for ordinary people.
According to foreign media reports, opposition politician Johnny Wright Sol told the media: “This is a very bad day for President Buckler, his government, and his Bitcoin experiment. .”
“Most people know very little about cryptocurrencies. What we do know is that this is a very volatile market. Today, this is obvious.” Sol said.
Despite many “episodes”, the president of the country seemed to be enthusiastic. El Salvador’s President Booker tweeted again later on September 7 that the government took advantage of the decline and bought another 150. Bitcoin.
Booker wrote on Twitter: “El Salvador currently holds 550 Bitcoins, most of which have been purchased since Monday.”
Why did El Salvador become the first “crab-eater”?
Since the announcement of Bitcoin as the national legal tender in June this year, El Salvador has been questioned and warned from all walks of life.
Prior to this, the IMF and other institutions have issued consecutive warnings, hoping that the Salvadoran government will treat Bitcoin with caution. The IMF stated that El Salvador’s decision to adopt Bitcoin as legal tender may bring a series of risks and regulatory challenges.
On September 7, the World Bank spokesperson reiterated that “considering the environmental and transparency deficiencies”, the bank will not help El Salvador adopt Bitcoin.
In addition, due to the great uncertainty of Bitcoin, rating agency Moody’s also downgraded El Salvador’s credit rating.
Johns Hopkins University Honorary Economist Steve Hanke believes that Bitcoin will cause big problems for El Salvador, and its extreme volatility, corruption potential and uncertainty are just the beginning of a long list of problems.
“Nayib Bukele (President of El Salvador) lives in Gensokyo, and his BTC law is the secret of disaster.” Steve Hanke wrote on Twitter.
Despite constant criticism and obstruction, this small Central American country with a population of less than 7 million took the lead in taking this disruptive step.
Why did El Salvador, who had been little-known before, become the first “crab-eater”? This may start from the social history, economic structure, and dollar hegemony of El Salvador.
El Salvador is located in the northern part of Central America, covering an area of 21,393 square kilometers. The area of El Salvador was originally inhabited by the Mayan Indians. It became a Spanish colony in 1524 and became independent from Spanish rule on September 15, 1821.
From 1979 to 1992, a fierce civil war broke out between the military government and a joint organization of left-wing guerrilla groups. In 1992, the two sides of the Civil War signed the “Chapultepec Peace Agreement” and established a multi-party constitutional republic, which continues to this day.
Factors such as conflicts left over from the civil war, low cultural level, and party struggles have severely restricted the local economic development. As the most densely populated and smallest country in Central America, El Salvador’s economy is dominated by agriculture, and it is one of the “low- and middle-income countries” in the world.
According to data from the World Bank, El Salvador has 21,040 square kilometers, but it has a population of 6.5 million. In the IMF rankings, the country’s economy ranks 106th, with a total GDP of less than 70 billion U.S. dollars.
At the beginning, the Salvadoran colony was used in Salvador. Due to severe inflation, the Salvadoran colonn system collapsed. Subsequently, the authorities decided to designate the U.S. dollar as legal tender from January 1, 2001, and the El Salvador Central Bank would no longer issue colones. The exchange rate is fixed at 8.75 colones to 1 U.S. dollar.
Currently in El Salvador, the U.S. dollar has become the hard currency of people’s lives. People buy bread and pay rent in U.S. dollars. As for the Salvadoran colon, its collection value is even greater than its own value.
In other words, El Salvador does not have its own currency, and its financial system and economic development rely heavily on the U.S. dollar. Not only that, but El Salvador’s economy is also heavily dependent on foreign countries.
According to statistics, as of 2020, as many as 1.5 million Salvadorans are working all over the world. “Foreigners” account for nearly a quarter of the population of 6.5 million people in the country. Remittances of US$5.9 billion (World Bank, 2021) also accounted for nearly 20% of the country’s GDP.
At the same time, El Salvador’s economic transactions mainly use cash, and about 70% of people do not have a bank account or credit card, which means that Salvadorans have to pay expensive fees for international transfers. According to estimates, if Salvadorans working outside use Bitcoin to remit money, they will save about US$400 million in remittance fees.
According to the Securities Times, economics professor Zhang Rui believes that El Salvador is an economy dominated by cash transactions. Approximately 70% of people do not have a bank account or credit card and cannot enjoy banking services. However, El Salvador’s mobile phone penetration rate is as high as 146%, each holds about 1.46 mobile phones, so if they can learn to use bitcoin peer-to-peer transfer transactions through mobile terminals, it can make up for the lack of access to bank retail services, and greatly improve the degree of financial inclusiveness.
Well-known economist Song Qinghui also told Phoenix.com “Eye of the Storm”: ” Usually cross-border transfer fees are very expensive, and intermediary banks generally charge more than 10% of fees. In this context, it is fast, convenient, and without commissions. The characteristic bitcoin has naturally become El Salvador’s ideal currency, which is convenient for receiving payments and remittances. “
In recent years, serious inflation in the US dollar has also directly affected the economy of El Salvador. In particular, due to the impact of the new crown epidemic in 2020, the Fed’s reduced asset scale in 2019 has increased by about 21%. This has also caused global prices and even real estate prices, labor prices, stocks, and bond prices to rise, and aggravated the divide between the rich and the poor. At the same time, it reduces the purchasing power of wage earners.
The country’s President Booker claimed that because the country has used the U.S. dollar as its legal tender since 2001, and during the epidemic, the Federal Reserve’s quantitative easing policy weakened the U.S. dollar and weakened the country’s purchasing power. Therefore, in order to offset the impact of the Fed’s policy, It is necessary to increase the supply of bitcoin, a medium of exchange that is not controlled by the central bank, into legal tender, and to keep it in line with the domestic U.S. dollar.
Therefore, the choice of Bitcoin in addition to the legal currency of the U.S. dollar is not a whim, but a way to get rid of the impact of the U.S. dollar on the national economy and reduce the cost of huge remittances.
Behind the “Bitcoin Experiment”, the “Game of Thrones” of a few people
However, there may be more complicated reasons behind El Salvador’s listing of Bitcoin as a national legal tender.
The public protests staged on “Bitcoin Day” may also reveal the fragmented attitude towards Bitcoin in El Salvador.
President Nayib Bukele and cryptocurrency supporters sparing no effort in “propaganda” on social platforms may have blinded many people.
According to foreign media reports, as early as the passage of the bill in June, the Salvadoran people staged numerous protest demonstrations. They think this move will not help the poorest people in the country.
A resident told Reuters: “This is a currency that does not work for pupusa vendors, bus drivers or shopkeepers.”
A survey by the University of Central America (CAU) shows that about 70% of Salvadorans oppose Bitcoin as legal tender, and opposition lawmakers have also initiated efforts to repeal the law.
A poll released this month by the Universidad Centroamericana José Simeón Cañas University of El Salvador also showed that more than 65% of Salvadorans do not want the government to spend taxpayer money to adopt Bitcoin, and 80% have little or no confidence in Bitcoin.
In fact, behind the rapid passage and implementation of the Bitcoin bill in El Salvador, it may be a “game of power” for a few people.
According to media reports, the official adoption of Bitcoin comes at a time when President Booker is facing increasing resistance to economic development, expanding budget gaps, and limited access to the bond market.
In addition, the diplomatic relations between El Salvador and the Biden administration have been tense, because international organizations accused Booker of using dictatorial means to control El Salvador.
In May of this year, Mr. Booker’s ruling party dismissed all members of the country’s Supreme Court. Late last Friday (September 3), the newly appointed Supreme Court judges ruled that Booker could be re-elected for two terms, allowing Booker to run for re-election. The U.S. Embassy in El Salvador stated that the ruling violated the El Salvador’s constitution, which prohibits direct re-election.
According to foreign media reports, in order to get rid of U.S. control and consolidate the status of the ruling party, President Booker and his supporters ” passed this bill quickly without public opinion polls. “
Opposition politician Wright Sol revealed that the Bitcoin bill was passed quickly at the time: “The Bitcoin law was passed almost without any debate in Parliament, and the whole process only took about 5 hours.”
Will the “El Salvador Effect” challenge the hegemony of the US dollar?
The actions of El Salvador also triggered a “donino” effect on the American continent.
Since the passage of El Salvador’s “Bitcoin Law”, some Central and South American countries have come forward to show their official attitudes towards Bitcoin. Among them, Cuba has begun to legalize cryptocurrencies already used on the island, while Panama and Uruguay have been The country’s legislators also proposed similar legislative regulations.
Representative Carlos Rejala of Paraguay of South America stated on the day of the official announcement in El Salvador: “It plans to submit an “important bill” related to Bitcoin this week. The bill will allow cryptocurrency companies to use cryptocurrencies to fund Paraguayan businesses and make them Capitalize profits to local banks.
The more radical Panamanian Congressman Gabriel Silva announced on Twitter: Panama may become the second country to support the addition of cryptocurrency to legal tender.
In addition to El Salvador, the American politicians from Paraguay, Panama, Brazil, Colombia, Argentina, Mexico, and Ecuador have expressed their keen interest in Bitcoin in different ways.
And these countries basically have one thing in common, that is, most countries are extremely dependent on the US dollar, and even the official legal tender issued has been replaced by the US dollar.
Economics professor Zhang Rui believes that these countries have also lost the independence of monetary policy, and the government’s ability to regulate the economy has been significantly marginalized. Although, like El Salvador, choosing Bitcoin as a legal tender is not to “get away from the dollar,” but if the application of digital currency can increase the country’s economic independence, it is also the result they are willing to see.
Zhang Rui said that economies such as El Salvador do not have the strong financial technology of China and European and American countries. They can only use the power of private virtual currency to complete the layout of legal digital currency, and even Bitcoin is “blocked by many big countries.” Against the background of “, many small and weak countries also want to take the opportunity to “picking” in order to quickly obtain their own shortage of external financial resources. In this sense, there may be more countries outside of El Salvador upgrading Bitcoin to legal tender, which may contain elements of financial games.
Will El Salvador’s Bitcoin fiatization storm in the Americas challenge the hegemony of the US dollar?
Li Yang, chairman of the National Finance and Development Laboratory and member of the Chinese Academy of Social Sciences, said in an interview with Phoenix.com Finance:
“The adoption of Bitcoin in El Salvador, Panama and other countries shows that they no longer trust the U.S. dollar and really want to get rid of it. The credit of the U.S. dollar is also decreasing. But now due to the long-term dominance of the U.S. dollar in the international financial field, you cannot get rid of it for the time being, especially It’s a small country.”
A researcher from an American financial consulting agency told Phoenix.com “Eye of the Storm”: “Even in El Salvador, there are still many difficulties in the popularization of Bitcoin’s legal currency. Other countries in the Americas are just following the trend and not substantively implementing it. The future of the US dollar Hegemony may be weakened, but it will go through a long period, and it is not necessarily Bitcoin that plays this role.”
Soaring and plummeting, Bitcoin “fiatization” is full of risks
As we all know, a major feature of legal currency is its stability. The characteristics of Bitcoin are just the opposite. Its price fluctuates greatly, so as a legal currency, it will also face great risks.
On September 7, the “Bitcoin Day” in El Salvador, the price of Bitcoin suddenly crashed. In more than an hour, the price fell from a price of around US$50,000 to a low of US$42,830, falling more than US$7,000, an intraday drop of 18.73%.
The Bitcoin flash crash led to a widespread decline in cryptocurrencies across the network, causing a large amount of funds to be liquidated. According to data, as of 6:30 on September 8, Beijing time, a total of 397,559 million people have liquidated their positions in the past 24 hours, with a liquidation amount of 28.161 billion yuan. .
Among them, in the past 24 hours, the largest single liquidation amount even reached 43.7 million US dollars, or about 283 million yuan.
Some analysts believe that profit-taking is the main reason for the crash of Bitcoin after the good news.
According to Jinshi, analyst Tony Spilotro said that investors or traders may not be bearish on Bitcoin, but profit taking is never a bad idea. This may have an unexpected impact on over-leveraged long traders, causing a knock-on effect of stop losses, causing Bitcoin to fall through several barriers one after another.
Tony Spilotro believes that the fear that the legal monetization of Bitcoin will be difficult to achieve outside of El Salvador is also one of the reasons why the market’s confidence in the rise of Bitcoin has weakened.
Leah Wald, CEO of Valkryie Investments, stated that Bitcoin is facing its biggest challenge ever. The market’s reaction is not surprising. He said that “some time ago,” the market had basically digested the news.
Wald said: “The most noteworthy thing is whether neighboring countries in Latin America or other parts of the world have also begun to adopt Bitcoin as their national currency.” “If this happens, we will see a parabolic rise, because more More people have instant access to cryptocurrency, which will lead to more people adopting cryptocurrency, more holdings and higher prices.”
Bitcoin bullish and billionaire Mike Novogratz believes that the sudden plunge of Bitcoin on Tuesday was the result of investors’ overexcitement.
As for the Bitcoin price trend, he said that despite its strong performance in the past few weeks, it is difficult to predict how it will perform in the short term. But he said that in the long run, Bitcoin’s development trajectory is clear. “As far as I know, there are already enough large organizations that think this is an important store of value.” He said.
For El Salvador, Bitcoin pricing power is not in its own hands, which also means that in the future the entire country will have to bear the risk of Bitcoin price fluctuations.
Tan Yaling, an independent economist at the China Institute of Foreign Exchange Investment, believes that on the day when it officially became the legal tender of El Salvador, the price of Bitcoin plummeted by 19%, and 400,000 Salvadoran citizens suffered losses. Failure to achieve “de-dollarization” increased the risk of being suppressed by the US dollar, and El Salvador’s gains outweighed the losses.
” At present, most countries in the world have restrictions on Bitcoin, Bitcoin trading volume fluctuated sharply, and cryptocurrency trading platform technical problems continued. El Salvador was unable to cope with market turmoil and was forced to accept the price. ” Tan Yaling said.
Bitcoin is still controversial, global central bank digital currency racing
The controversy over Bitcoin continues, but the wave of digital currencies has swept the world.
Since the beginning of this year, the global central bank digital currency research and development has accelerated rapidly. Major global countries such as China, Japan, Germany, and the United Kingdom have all accelerated the development and implementation of digital currencies.
The Bank of Thailand announced that it will start testing retail central bank digital currencies in the second quarter of next year; the Bank of Japan announced that it will conduct the first phase of confirmatory testing on central bank digital currencies from that day; the Riksbank said that banks will be tested in the next year The central bank’s digital currency e-krona.
The Bank of Russia also stated that it plans to build a digital ruble platform by December 2021 and start testing in the first quarter of next year; the Bank of England announced that it will establish a central bank digital currency working group in conjunction with the British Treasury to coordinate the country’s digital currency exploration.
The survey report released by the Bank for International Settlements shows that at present, 86% of central banks in the world are exploring central bank digital currencies, and more than 60 countries have experimented with their own central bank digital currencies.
And China is already at the forefront of the world in the development and application of central bank digital currencies. At present, there are already 10 cities and one Winter Olympics scene in China’s nationwide digital RMB pilot areas.
On April 18th, Li Bo, deputy governor of the People’s Bank of China, revealed that the next step is to further build an ecosystem of digital renminbi infrastructure.
On the evening of April 18 this year, Li Bo, then Deputy Governor of the People’s Bank of China, stated at the “Digital Payment and Digital Currency” sub-forum of the Boao Forum for Asia 2021 Annual Conference that there is no specific timetable for the launch of the digital renminbi, and emphasized that The development focus of the digital renminbi is currently mainly to promote its domestic use.
In July 2021, the “White Paper on China’s Digital RMB R&D Progress” released by the People’s Bank of China’s Digital RMB R&D Working Group showed that as of June 30, 2021, there have been over 1.32 million digital RMB pilot scenarios, covering life payment and catering services. , Transportation, shopping and consumption, government services and other fields. More than 20.87 million personal wallets and 3.51 million public wallets were opened, and the total number of transactions was 70.75 million with an amount of approximately 34.5 billion yuan.
It is worth noting that in May of this year, at the 2021 Tsinghua Wudaokou Global Finance Forum, Zhou Xiaochuan, the president of the Chinese Finance Society, the honorary dean of the Wudaokou School of Finance of Tsinghua University, and the former president of the People’s Bank of China, had misunderstood the digital renminbi that is being piloted. Respond to clarification.
Zhou Xiaochuan said that the development of DC/EP is mainly based on the modernization of China’s domestic payment system, keeping up with the pace of the digital economy and the Internet era, improving efficiency and reducing costs, especially for retail payment systems. The original purpose and direction of the design did not intend to replace the U.S. dollar’s status as a reserve currency and the status of an international payment currency.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/el-salvador-bitcoin-experimented-with-a-financial-disaster-in-a-small-country-with-a-population-of-6-million/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.