Is El Salvador Signaling the Future of Bitcoin?
Bitcoin is now legal tender in El Salvador. By outsourcing the country’s monetary policy to a decentralized network of computers, El Salvador is realizing the cypherpunks’ dream. But what will the move mean for the rest of the emerging world?
By Xische Editorial, June 28, 2021
Source: angelbi88/Envato
El Salvador has gone and done it. The small Central American country took the leap into crypto and beyond and became the first country in the world to make Bitcoin legal tender for all debts, public or private. While the price of a Bitcoin is under some current pressure, El Salvador’s decision will have significant ramifications across the world. Not only will Salvadorans living abroad have an easier time sending home remittances, but the country will have more control over its financial futures.
In a vital piece for the Wall Street Journal, Max Raskin puts the decision into the proper context. El Salvador’s legislators, Raskin writes, “essentially voted to begin the process of outsourcing the country’s monetary policy to a decentralized network of computers governed by a fixed set of rules. This is an important step toward a world where money is sound, not subject to the vagaries of politics.”
The final point is arguably the most important. El Salvador dollarized its economy in 2001, and since then, the country has been subject to the whims of the US Federal Reserve. Coupled with a series of complex loan agreements with the International Monetary Fund, this means that El Salvador hasn’t had the full ability to chart its financial future. Adopting Bitcoin is a step towards changing this situation, and that’s precisely why the trend could spread to other countries.
Some might look at the current price fluctuations of Bitcoin and think that Salvadorans have lost their marbles by embracing the currency. But lawmakers came up with a creative solution to work around the volatility. The government created a free-floating exchange rate determined by the market. When someone transfers bitcoins to dollars upon receiving them (from a remittance, for example), the exchange rate ensures he will have the equivalent in dollars. Moreover, Salvadorans can hold their savings in either dollars or Bitcoins.
Many analysts expect similar-sized countries to follow El Salvador’s lead in embracing Bitcoin for the simple reason that it gives lawmakers much more control over their economy. The Fed has been (correctly) accused of weaponizing the dollar and dollar dependence throughout various periods, and just this week, comments made by Federal Reserve leadership spooked currency markets around the world.
It’s unclear how quickly it will take other countries to follow El Salvador’s lead, but it’s a safe bet that others will follow. This raises a complicated set of questions for countries at the heart of the emerging market financial system like the UAE. As one of the leading countries for remittances in the world and deeply connected to the US financial system through its Dollar currency peg, the UAE should pay extra close attention to the adoption of Bitcoin around the world.
The UAE’s connection to the US financial system, which is facilitated primarily by the trading of hydrocarbons, serves both countries well at the present moment. As the UAE grows into its role as a hub of the emerging world, new considerations might drive financial decisions that seek to deepen connections with emerging countries. As small countries like El Salvador look to alternatives to the US-dominated financial system, the UAE might need to build new alliances and partnerships while ensuring the long-standing partnership with the US.
Don’t expect such movements anytime soon, but changes are afoot in how the global financial system operates. As such, it's critical for the UAE to establish sufficient regulations governing the use of cryptocurrency that act to protect the financial system while ensuring that the country can take part in the exciting changes happening around the world. Put simply; the belief that cryptocurrencies will simply go away like an out of date fashion has been proven wrong. The technology is here to stay. El Salvador is pulling the future-forward. It’s time to start preparing for the next iteration of global finance.
