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El Salvador’s Bitcoin Experiment

El Salvador, a relatively small country with a population of 6.5 million and bordering Mexico from below, initiated an extraordinary experiment of making Bitcoin legal tender.

“In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy,” said El Salvador’s President Nayib Bukele while participating in the world’s biggest digital asset event “Bitcoin 2021 Conference” held in Miami on the 5th (local time) via video. He also announced his plan to submit a bill acknowledging Bitcoin as legal tender to the Legislative Assembly.

Considering that president Bukele’s ruling party “Nuevas Ideas” holds majority in the assembly, it is highly likely that the submitted bill will pass.

His announcement to introduce a financial infrastructure suited to using Bitcoin as legal tender signifies that his plans are more than just a visionary scheme. Bukele also said that he has struck a partnership with the US digital wallet company Strike as the first step to establishing a modern financial infrastructure geared toward using Bitcoin as legal currency in El Salvador.

Strike is a company that produces payment platforms based on Lightning Network, a scalability improvement technology for speeding up Bitcoin’s transaction speed by enabling quick and lower-priced transactions on side chains separate from the Bitcoin blockchain. In March, the company had released a mobile payment application in El Salvador.

During the event, Strike’s founder Jack Mallers said that Bitcoin is the “greatest reserve asset ever created and a superior monetary network.” He added that “holding Bitcoin provides a way to protect developing economies from potential shocks of fiat currency inflation.”

In fact, El Salvador had used its own legal currency, “Colon,” since 1892. However, with rampant corruption and criminal organizations causing the underground economy to grow massively and the currency value falling due to excessive currency issue, people lost faith in Colon, and the country replaced it with US dollar as legal tender in 2001.

Meanwhile, large-scale inflation policies continued in the US through the 2007~2008 global financial crisis and the coronavirus pandemic, giving rise to a steeper monetary inflation in El Salvador. In fact, President Bukele put blame on the US central bank Fed during the event, saying that the unprecedented level of inflationary policies of the US left the country no choice but to accept Bitcoin as legal tender. He added that the Fed is “increasingly taking actions that may cause harm to the economic stability of El Salvador.”

Bukele’s experiment seems to be putting into practice what Gemini’s CEO Tyler Winkelvoss said: “Bitcoin is the only vaccine in the world that can give you immunity to the money printing disease.”

All aside, the outlook does not look too bad. Nearly 70% of all El Salvadorians own no bank account or credit card, so most economic activities are done in cash, that is, in US dollar. Considering this, Bitcoin demand in the country will most likely go up high. The mobile payment app Strike released in El Salvador has been gaining nearly 20,000 new users every day for the past two months.

However, it remains to be seen whether the use of Bitcoin as legal tender will be able to flush the underground economy into the light in a country rampant with crime organizations and with the world’s highest crime rate. Another variable is how to deal with the difficulties in carrying out the monetary policies that may arise in the process of using the highly volatile Bitcoin as legal currency.

But we can hope that, even if this huge experiment in El Salvador fails, similar attempts will be made in other developing or underdeveloped countries any time in the future. Let’s see if Bitcoin can earn the faith in a country where its own currency has collapsed, and look forward to a cashless society made possible with digital assets.

*This research and analysis material was produced for the purpose of providing reference information based on reliable data and information. However, its accuracy or quality is not guaranteed.

*This material reflects personal opinions which may not be consistent with the company’s official views.

*This material has never been provided to third parties such as institutional investors

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