EL SALVADOR’s experiment with Bitcoin got off to a rocky start as the price crashed on the first day as legal tender while its introduction was hampered by technical glitches.
The cryptocurrency tumbled up to 17% to its lowest level in a month when it was revealed that the government disconnected its Bitcoin wallet early Tuesday to fix issues.
Late in the morning the problems appeared to have been overcome, and President Nayib Bukele tweeted that the app was again available for download.
The largest cryptocurrency fell to $ 43,050 in New York on Tuesday before the losses were recouped. Mr Bukele said his country used the crash to “buy the dip” and added 150 coins to bring its total holdings to 550, worth about $ 26 million.
The Bloomberg Galaxy Crypto Index, which tracks some of the largest cryptos, lost up to 19% while other smaller digital assets were also sold.
El Salvador’s plan represents the largest test of Bitcoin in its 12-year history. Both cryptocurrency enthusiasts and critics are watching the experiment to see if a significant number of people would like to transact with Bitcoin when it is alongside the US Dollars in circulation and whether it will benefit the violent, impoverished Central American nation.
If the experiment is successful, other countries could follow El Salvador’s lead. Its rollout will get its first boost from the government’s Chivo bitcoin wallet, preloaded with $ 30 worth of currency, for users who register with a Salvadoran national ID number.
Businesses will have to accept Bitcoin in exchange for goods and services, and the government will accept it for tax payments. The plan is the brainchild of the 40-year-old President of El Salvador, who says it will attract more people into the financial system and make remittances cheaper.
“This is a brave new world,” said Garrick Hileman, research director at London and Miami-based Blockchain.com. “We are in uncharted territory with this start, but I am pleased that this experiment is being carried out as a whole, and I think we will learn a lot from it.”
Mr. Bukele’s administration has installed 200 Bitcoin ATMs across the country that can be used to exchange cryptocurrency for US dollars. The Treasury Department has set up a $ 150 million fund at the state bank Banco de Desarrollo de la Republica de El Salvador in Bandesal to support the transactions.
Twitter users reported Tuesday that they can use Bitcoin to pay for services like breakfast at McDonald’s. Still, the dollar will remain the national currency for public accounting purposes and traders who are technically unable to obtain the e-currency will be exempted from the law, the government said.
El Salvador’s dollar economy is heavily reliant on foreign remittances from migrants, which totaled $ 6 billion last year and account for about a fifth of its gross domestic product. Mr Bukele says Bitcoin could save Salvadorans $ 400 million a year in fees for these transactions.
While Mr Bukele himself enjoys approval ratings of more than 80%, a survey by the Universidad Centroamericana in El Salvador, Jose Simeon Canas, found that his Bitcoin law is largely unpopular. Two-thirds of respondents said the law should be repealed, while more than 70% said they would prefer to use US dollars instead.
The International Monetary Fund warned of the risks of using Bitcoin, which lost almost half of its value from April to May, and the World Bank turned down a request from the El Salvador government to help the government get it started, citing environmental and transparency disadvantages. The Bitcoin news also helped spark a sell-off of El Salvador’s dollar bonds, though it has since reduced losses.
“Crypto is sexy, but untested and complicated, especially for a country like El Salvador,” said Nathalie Marshik, Managing Director of Stifel Nicolaus & Co .. “It’s extremely risky, and the question arises as to whether the bandesal fund is big is enough? The rules look like the law, put together very quickly. It’s a big question mark. “
While the Bahamas introduced its own central bank-backed digital currency this year with the Sand Dollar and Venezuela has its own e-money called Petro, these are very different from a decentralized cryptocurrency like Bitcoin, whose users value their independence from governments and central banks .
Other governments in the region will look closely. Last month, Cuba started legalizing the cryptocurrency already used on the island, while lawmakers in other countries like Panama and Uruguay proposed similar laws.
Salvadoran bonds fared worst in emerging markets on Tuesday, according to data gathered by Bloomberg after the country’s Supreme Court ruled last week that the president could run for a second term. The US criticized the decision, saying it harmed bilateral relations between the two nations. Debt due in 2041 fell as much as 5%, its highest level in four months, and traded at 86.6 cents a dollar. – Bloomberg