Learn about the pros and cons of using Bitcoin as the...

Learn about the pros and cons of using Bitcoin as the...
Learn about the pros and cons of using Bitcoin as the...

El Salvador on Tuesday will become the first country in the world to recognize bitcoin as legal tender, a move President Najib Bakila says will save Salvadorans living abroad millions of dollars in commissions on money they send home.

Despite Baqila’s popularity, the move has been met with skepticism by many Salvadorans who are concerned about the volatility of the cryptocurrency and how his scheme will work. Here are some of the pros and cons that emerged from El Salvador’s plan, which was first launched in June.

Transfers

Last year, Salvadorans sent nearly $6 billion from abroad, mostly from the United States, the amount equivalent to about 23% of the country’s gross domestic product. He said it was spent every year in commissions for transfers.

But many people who send or receive dollars to El Salvador do not trust Bitcoin, and meanwhile, World Bank data shows that the costs of remittances in the United States that rely on dollars in Central America are already among the lowest worldwide.

carbon traces

The Bitcoin scheme in El Salvador has highlighted the environmental impact of cryptocurrencies, with the World Bank citing such potential negative impacts among its concerns, and Bank of America said in March that extracting digital currency from cyberspace requires large amounts of energy, and carbon dioxide emissions have risen. The global carbon of the Bitcoin industry to 60 million tons, equivalent to the exhaust of about 9 million cars.

Bakila sought to address sustainability concerns by saying in June that he had instructed state-owned geothermal company LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country’s volcanoes.

Required audit

While advocates of bitcoin is an innovation independent of the government’s whim, they have issued warnings that it may increase the regulatory, financial and operational risks of financial institutions, among them international anti-money laundering and terrorist financing rules.

In June, rating agency Fitch Ratings noted that “capital gains will not be taxed and taxes can be paid in bitcoin, which could attract foreign inflows of bitcoin into the country, and this could increase the risk of proceeds from illegal activities passing through the Salvadoran finances.”

The International Monetary Fund has cited legal concerns about the adoption of bitcoin amid its talks with El Salvador over a nearly $1 billion financing agreement, which is still pending. Dollar denominated under pressure.

currency exchange rate

Bakila has created a $150 million fund to enable the conversion of bitcoins into dollars, but doubts remain about how the country will avoid risks associated with sharp fluctuations in the digital currency, whose value can vary by hundreds of dollars per day.

Fitch argued that bitcoin would be credit negative for Salvadoran insurers exposed to the currency due to higher foreign exchange risk and profit volatility.

However, for those holding Bitcoin, it has proven to be a popular method of payment in El Zonte, a beach town that was one of the launching pads for cryptocurrency in El Salvador.

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