LA LIBERTAD, EL SALVADOR - JUNE 16: Beach town of El Salvador's El Zonte has been using Bitcoin for ... [+] small transactions for the last two years. (Photo by Alex Pena/Anadolu Agency via Getty Images)
When El Salvador decreed that bitcoin was to be made legal tender, the news reverberated around the world. Bitcoin proponents swiftly hailed the move as the progressive future of money, but many others were not convinced. It remains to be seen whether cryptocurrencies are a panacea for a reserve currency for developing nations.
The negative sentiment hasnt tempered El Salvadors enthusiasm for the great de-dollarization experiment and other developing countries are now contemplating following suit.
With the emergence of Central Bank Digital Currencies (CBDCs) and potential suitors for the status of a global reserve currency one thing is for sure, we are in for an exciting show in this next era of the evolution of digital currency.
Outside of the U.S. and its territories, eight sovereign nations Ecuador, El Salvador, Zimbabwe, Timor-Leste, Palau, Panama, the Marshall Islands, and the Federated States of Micronesia, use the U.S. Dollar as theirofficial currency. The British Virgin Islands and the British Turks and Caicos Islands also use the USD as an official currency of exchange.
Many other countries use currencies with fixed exchange rates to the USD while users of crypto worldwide has risen to 221 million according toCrypto.coms onchain research.
While dollarization was implemented to reduce currency risk and increase international investment and trade, the consequence for these nations is that they are effectively outsourcing their monetary policy to the U.S. Federal Reserve. This has created a hierarchical relationship that forgoes many of the tools required to influence their own economies by adjusting the money supply or exchange rate.
This dollar-dependent system results in the loss of a national symbol, can increaseinequalitythrough the reduction in purchasing power caused by debasement, and gives upseigniorage incomethat reduces GDP and passes it to the U.S.
Jeff Bandman, a cryptocurrency and digital assets expert, is a Principal at Bandman Advisors and a former CFTC Director and founder of LabCFTC and observes, For some countries seeking an alternate path to pegging their currency to the dollar, sterling or euro, an intriguing choice is whether to outsource monetary policy to the bitcoin algorithm.
"Since Facebook introduced the Libra proposal for a global stablecoin over two years ago, policymakers have focused considerable attention on the risks of a stablecoin issuer with billions of potential users conducting or exercising undue influence over monetary policy.
"Because of bitcoins price volatility, it has been been largely discounted by sovereigns until recently, missing the potential benefits for consumers and businesses who rely on its transparent algorithm, which in some instances, may be more predictable than another countrys central bank."
The case for seeking alternative monetary solutions that lie beyond Americas purview, for developing countries, is a compelling one, but is bitcoin the answer? At least one developing nation thinks so.
El Salvador, one of the eight sovereign nations using the USD, broke from the pack, passing a bill onJune 9that will see bitcoin become legal tender in the country in September and join the USD as its official currency.
This marks the first time bitcoin has been adopted as a legal tender in a sovereign nation, attracting praise from politicians in Latin America, Africa, and other parts of the developing world.
Maggie Wu, the CEO of blockchain venture capital firmKrypital Group acknowledges the current challenges in bitcoin adoption but is optimistic about the future and states, I believe that bitcoin adoption is conceivable, especially in the relatively small developing countries with inadequate monetary systems where the recognition of digital currencies there is relatively high, especially BTC.
The blockchain-related infrastructure that can carry digital currencies in most Central and South American countries and regions is not complete, including wallets, exchanges, etc. This is also the direction of our investment focus. We think there is huge potential and value here for fostering crypto adoption throughout the region.
El Salvadors adoption of bitcoin has brought concern from officials in developed nations as well as from international NGOs who often describe bitcoin as having few redeeming public interest attributes.
In response to such criticism, El Salvador President Nayib Bukelecommented, Who'd be against something that helps the people and doesn't do any harm? They're probably politically motivated.
El Salvadors economy relies heavily on the remittance market, representing over20 percent of GDP, or around $6 billion annually, with 95 percent of remittances sent from Salvadorans working in the U.S. to their families back home. Existing remittance services charge fees for these transfers that can make up a significant proportion of the value sent, particularly for smaller transfers. Funds can also take days to arrive and often require collection in person and given that an estimated70 percentof the El Salvador population are without access to a bank account, this increases time and costs further.
Remittance is one reason why the country is turning to bitcoin and the Lightning Network. Bitcoin provides an open monetary network in which anyone can participate without permission from a central authority. TheLightning Networkis a second-layer payment protocol, meaning that it offers a scaling solution built on top of the bitcoin network that allows for near-instant transactions with near-zero fees.
Milana Valmont is the Founder and CEO of blockchain-based fintechKIRA. She believes that bitcoin and Lighting Network technology can bring financial inclusion to El Salvador.
"Bitcoin adoption has the potential to decrease the risk of current and future governments imposing policies that might affect freedom of movement of capital and value of assets, stocks and other financial mechanisms used within and outside of local economies, says Valmont.
Following discussions between the El Salvador government and the U.S. digital payment company Zap Solutions that led to the bill, the President announced a $30 incentive for citizens to use thegovernments official bitcoin wallet application, Chivo.
Having already developed the payments applicationStrike, which uses bitcoin and the Lightning Network to offer instant and free payments globally, Zap Solutions appears well placed to help deliver the new El Salvador wallet which will allow users to convert between USD and bitcoin and send and receive payments in either currency using QR codes.
The wallet, set to launch in September when the new law comes into effect, will be available on iOS and Android devices that are far more accessible than bank accounts in the country and will not require a data plan. Transactions and conversions will be free, no commissions will be charged to merchants unlike credit cards, and users will also be able to access free USD withdrawals from over 200 Chivo branches or ATMs, asclarified by the Presidentin a recent update. The government will absorb any conversion costs as they are much cheaper than the administration of the current USD system, according to Bukele.
As a security measure, users must register for the wallet with their phone number and national ID to confirm against the records already held by the government. However, use is also optional and citizens are free to use any bitcoin or Lightning wallet of their choice with which the government wallet is also fully compatible. The use of bitcoin itself is also optional.
Anyone receiving payments in bitcoin can choose for it to automatically be received in USD instead, offsetting any concerns regarding the volatility of bitcoins value. This approach has brought criticism with questions regarding the safety of the government platform from attacks, citing high-profile hacks on third-party platforms.
In theory, it should be as safe as any major bitcoin wallet or exchange while avoiding dependency on either with the El Salvador government being ultimately responsible for ensuring assets are stored safely, providing more reassurance to some. As bitcoin funds can be removed to a wallet of the user's personal choice and control instead, for others it may simply serve as an on/off ramp between USD and bitcoin, without having to store funds on there for long periods.
Many have questioned whether bitcoin is the best solution for El Salvador and other developing nations, citing the often high transaction fees and slow processing times of the bitcoin blockchain. These concerns are alleviated by building applications on the Lightning Network instead, using channels that act similarly to a bar tab on top of the Bitcoin network, only settling back to it when necessary. This is what facilitates the near-instant and free transactions that make it viable as a currency.
Concerns remain among critics regarding the capacity of the solution for mass adoption, suggesting that the Lightning Network does not completely solve bitcoins transaction fee problem with costs to open and close channels and fees to route payments. The system is also reliant on a network of computer nodes that are required to be online at all times so payments can be sent and received, leading to offline transaction risk. Network congestioncaused by a potential malicious attack that could be used to attempt to steal funds from parties unable to withdraw due to such congestion is also cited.
Longer-term concerns have been raised surrounding the impact of quantum computing on the security of the cryptography used in technology like bitcoin, though such breakthroughs are likely some way off andquantum-resistant blockchainssuch as QANplatform have emerged to offer more future-proof alternatives.
Others have suggested the adoption of stablecoins or smart contract technology platforms likeXinFinwould be more suitable, providing the high transaction throughput and low fees El Salvador is looking for, as well as access to decentralized finance that can open up other use cases for cryptocurrencies like peer-to-peer lending and borrowing.
Whether through second-layer solutions built on top of bitcoin or through alternatives in the world of decentralized finance, there seems little doubt that the nation-state era of blockchain technology adoption has begun in the developing world, providing an alternative monetary solution to support growth, financial inclusion, and escape from poverty.
While developing countries led by El Salvador are opening up to the opportunities that bitcoin can bring, CBDCs projects are on the rise with the G20 economies, alongside finance ministers and central bank governors from other countries, many working with the IMF, World Bank, and BIS on their development. Over80 percent of the worlds central banks now researching their implementationaccording to the BIS. Though widespread deployment of CBDCs does not appear imminent, get ready - it is coming.
Arguably the most progress has been made by the Peoples Bank of China, with pilots for the newDigital Yuantaking place in Shenzhen, Suzhou, Xiong'an, and Chengdu. Richard Turrin, author of bestseller Cashless - Chinas Digital Currency Revolution, believes that China has stolen a march on the West that politicians and policy makers better wake up to.
Says Turrin, China clearly sees digital currency as a solution for increasing financial inclusion among its people, and increasing the level of societal digitization with the launch of its new central bank digital currency. The first generation digital payment platforms Alipay and WeChat Pay have proven beyond a doubt that mobile-based payments play a big role in reaching remote communities and increasing digital GDP.
What China does not believe is that cryptocurrencies like bitcoin have an important role in financial inclusion. China sees cryptos as not connected to the real economy, speculative, and dangerous to hold.A position it has made clear through its recent reduction in bitcoin mining and its warnings to people not to buy crypto. Still, the ownership of crypto is allowed and protected under property rights so its not correct to say that its been banned.
The eyes of the world are on the digital yuans use in cross border settlement.This is considered by many as the killer use case as it would start a new digital cash transfer network apart from SWIFT.China is the worlds largest exporter and if it can make buying from or selling to China easier and cheaper through the use of the digital yuan it will have a winner.
"China has already set up blockchain based trade platforms in the Greater Bay Area that have faster customs clearance and cheaper trade finance.Once these have digital yuan attached to them they can offer importers and exporters real benefits that just may entice them to convert to the digital yuan.Well have to wait to see how it works out, but betting against the digital yuan would be risky."
The Bank of Japan's CBDC project is not far behind and the U.S.FederalReserve is currently working alongside the Massachusetts Institute of Technology to develop a Digital Dollar with a research paper exploring a move to a CBDC expectedthis summer. The Bank of Englandrecently announcedthe creation of a task force to explore a potential Digital Pound and is credited with coining the term CBDC back in 2016. Other advanced economies considering introducing CBDCs are Switzerland, Israel, South Korea, Sweden, Canada, Australia, and Singapore.
In July, the European Central Bank (ECB) announced it was progressing with a project to further evaluate a Digital Euro. Ulrich Bindseil, ECB Director General, Market Infrastructure and Payments, commented at The 19th Financial Services Conference 2021 in June, that a Digital Euro would (ultimately) be central bank money made available to citizens and businesses and would seek to co-exist with cash. He noted it would also be important for the Digital Euro not to crowd out private industry and that the project must seek synergies with industry. If the Digital Euro project were eventually to move ahead Bindseil estimated it would be four to five years to implement.
Though CBDCs could introduce several benefits, including reduced costs, more efficient payments, greater transparency, improved financial inclusion, and enabling of direct monetary policy, their detractors are wary of the drawbacks. There are concerns that CBDCs could lead to a system of complete financial surveillance of citizens and an erosion of privacy in contrast to pseudonymous peer-to-peer networks like bitcoin, even with fully controlled and regulated KYC / AML on and off ramps deployed to access bitcoin.
Regardless of the path of nation-states, the stage is set for the growth of both fiat and non-fiat digital currencies. Let us hope we focus on the practical use cases for citizens and businesses and that they can co-exist peacefully. The worlds monetary system looks like it may undergo the biggest changes since the Bretton Woods agreement that led to the USD becoming the global reserve currency. Whatever the outcome, financial history will invariably be written by the victor(s).
Excerpt from:
Could Developing Nations Follow El Salvadors Move To Bitcoin? - Forbes
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