Fact Box – The pros and cons of El Salvador, the first Bitcoin nation

File Photo: On April 25, 2021 you will see the banner “Accept Bitcoin for free, fast and without transfer” in the beach café in Punta Roca Beach in Lalibertado, El Salvador. Reuters / Jose Cabesus

September 6, 2021

San Salvador (Reuters) – El Salvador will become the first country in the world to recognize Bitcoin as a fiat tender on Tuesday, President Nayib Bukele said it will save millions of dollars in fees sent home by Salvadorans living abroad will.

Despite Bukele’s popularity, the move was skeptical among many Salvadorans, who are concerned about the volatility of the cryptocurrency and how its system works.

Below are some of the pros and cons that emerged in the El Salvador project, which was first launched in June.

transfer

Last year, Salvadorans sent home nearly $ 6 billion, mostly from the United States and abroad. That is around 23% of the country’s gross domestic product.

Bukele said last month that Bitcoin would generate “huge profits” by saving the $ 400 million Salvadorans spend each year on transfer fees.

However, many people who send and receive dollars to El Salvador are suspicious of Bitcoin https://www.reuters.com/world/americas/migrant-families-wary-el-salvador-becomes -first-adopt-bitcoin-2021 – 09-06. Meanwhile, according to the World Bank, US transfer costs to the dollarized Central American countries are already among the lowest in the world.

Carbon footprint

El Salvador’s Bitcoin program sheds light on the environmental impact of cryptocurrencies https://www.reuters.com/technology/how-big-is-bitcoins-carbon-footprint-2021-05-13, The World Bank points to such potential negative impacts to his concerns.

In March, Bank of America took a lot of energy to extract digital currencies from cyberspace, and global carbon emissions from the bitcoin industry are 60 million, the equivalent of the exhaust of about 9 million cars. They say it has increased to tons.

Bukele addresses sustainability concerns in June by saying: https://www.reuters.com/technology/el-savador-exploring-volcanic-bitcoin-mining-bukele-says-2021-06-09 It was done. Electricity company LaGeo is developing plans to deploy bitcoin mining facilities using renewable energy from the country’s volcanoes.

Corporate compliance

While Bitcoin marketing as an innovation is advocated regardless of government whims, it could increase regulatory, financial and operational risks for financial institutions, such as international money laundering prevention and terrorist financing rules. It causes a warning that there is.

In June, Fitch Ratings said, “Capital gains are not taxed and you can use Bitcoin to pay taxes, which could attract foreign Bitcoin inflows into the country. This is illegal. The risks arising from the law can increase the risk of passing through El Salvador’s financial system. “

The International Monetary Fund raised legal concerns about Bitcoin adoption in talks with El Salvador about a $ 1 billion financing agreement.

After the Bitcoin law was passed by Bukele, the rating agency Moody’s downgraded El Salvador’s creditworthiness. Bonds denominated in US dollars are also under pressure https://www.reuters.com/article/el-salvador-debt-idUSL1N2PJ23E.

Exchange year

Bukele is a $ 150 million fund to enable Bitcoin conversion https://www.reuters.com/technology/el-salvador-congress-backs-150-mln-fund-bitcoin-ahead-adoption-2021- 08-31 can be converted into dollars, but the question remains how the country avoids the risks associated with the rapid fluctuations in digital currencies. The value of digital currencies can fluctuate by hundreds of dollars every day.

Fitch claimed that Bitcoin would be credit negative https://www.fitchratings.com/research/insurance/bitcoin-implementation-credit-negative-for-el-salvador-insurers-16-08-2021 forex and due to the high risk of Income fluctuations, currencies.

“Insurers that hold Bitcoin on their balance sheets for long periods of time are exposed to price volatility, which increases wealth risk,” Fitch said last month.

Still, it has proven to be a popular payment method for those who own Bitcoin in El Zonte, a beach town that was one of the starting points for El Salvador’s cryptocurrency.

It has raised hopes that without convertible barriers, it could be a major foreign exchange earner.

(Edited by Dave Graham and Anthony Espposito, edited by Dan Grebler)

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