Crypto is in the news everywhere for its eye-popping growths and equally eye-popping falls. Amidst all this, a small country in North America, El Salvador, has become the first country in the world to approve the use of bitcoin as legal tender. Citizens, investors, and tourists can now use bitcoin just as any other currency to buy almost anything. It was President Bukele who introduced the bill in the parliament, which got approved within 24 hours! It seems outlandish that this first-of-a-kind move is being undertaken out of the blue by such a tiny country (104th by nominal GDP). Let’s dig a little bit deeper by looking at a few statistics. El Salvador is home to a population of 6.4M people. 1.5M are expatriates (citizens living in other countries). To support their family, these ex-pats send back their earnings to El Salvador, mainly in USD, which is currently used as a tender in the country (apart from its currency colón, which is as good as dead). In fact, the amount of money that is sent back makes up 20+% of the country’s GDP!
How does one send back money overseas? That’s where banks come to aid, but not before they charge a hefty transaction fee. El Salvadorian ex-pats pay Millions of dollars in these transaction fees. Most of Them are workers and labourers in western and middle eastern countries, who earn low wages. This is also detrimental for the country, which loses a significant chunk of its GDP because of these charges. Enter bitcoin. Ex-pats can now send back money at no extra cost! The other reason for bitcoin’s adoption was to attract foreign investment, which it does not have a lot of, owing to its extraordinarily high crime rates (more charts). However, there are problems. Big problems. Calling bitcoin volatile is an understatement. Citizens are not comfortable dealing with such an unstable currency. The International Monetary fund has raised concerns, and the World Bank refused to assist El Salvador, citing transparency concerns and environmental damage (Bitcoin mining requires lots of electricity). The world looks at this as an experiment, the first of its kind. Time will tell us where this leads.
List of countries by Remittances (India tops it!)
Electricity Consumption in Crypto Mining (As much as Malaysia)
World Bank (A bank for Governments)
International Monetary Fund (Oversees world’s monetary stability)