On balance: Pros and cons of El Salvador’s cryptocurrency approval
- El Salvador became the first country to accept cryptocurrency
- 23% of El Salvador’s GDP comes from remittances
- El Salvador has set up a $150 million-fund to exchange crypto and dollars
El Salvador on Tuesday became the first country in the world to recognise cryptocurrency as legal tender. The decision to accept cryptocurrency, a relatively new mode of currency exchange who value is sometimes deemed to be volatile, has been watched by countries and businesses around the world. But why did El Salvador decide to take the leap and what are the country’s reasons for recognising cryptocurrency?
El Salvador President Nayib Bukele, explaining why the central America country needed to accept cryptocurrency, said that the move will help Salvadorians living abroad save millions of dollars in commissions on money they send home.
The issue of remittances is indeed a big one for El Salvador. Last year, Salvadorians sent home USD 6 billion. Most of the money came in to the United States. The amount makes for 23% of El Salvador’s gross domestic product (GDP). Salvadorians, however, are skeptical of the promise of cryptocurrency, especially because of its volatility.
With El Salvador taking the crypto leap, many countries around the world may seek to follow suit. But extracting digital currency from the cyberspace is a power-intensive process. The crypto industry’s global carbon dioxide emissions have risen to 60 million tonnes, which is equal to the exhaust from 9 million cars, according to the Bank of America. The World Bank too has put a spotlight on the environmental impact of cryptocurrencies.
Advocates of cryptocurrency consistently pitch crypto as an innovation independent of government ‘caprice’. This has many Salvadorians worried that granting of legal tender to cryptocurrency could increase regulatory, financial and operational hazards for financial institutions. There are rising concerns around terror financing and money laundering as well.
The El Salvador government has set up a fund of USD 150 million to enable conversion of cryptocurrency into dollars, according to a Reuters report. However, doubts persist over how sharp fluctuations in cryptocurrency will impact value in dollars.