El Salvador has been everywhere in the news recently as the first country to adopt bitcoin as legal tender. This puts the cryptocurrency on par with the US dollar, which has held this status since the country abandoned its own currency, the colon, in 2001. The move marks the first time in history that a country has adopted a fully digital and decentralised currency for official national use. Salvadorans can now transact, take loans and pay tax with bitcoin, if they so choose. Slowly but surely, adoption of digital assets has moved on from something solely for retail users, or used in niche circumstances such as paying wages to sporting stars, towards the mainstream of public sector acceptance.
While the launch of the programme did not run perfectly smoothly, with the government’s official Chivo wallet experiencing a temporary blackout due to usage exceeding system capacity, the infrastructure is now in place for one of the most interesting economic experiments in recent history. With this adoption come many questions, particularly surrounding how central banks and other national and international financial institutions will deal with settling payments with the small Central American nation. Will the Central Reserve Bank (CRB) of El Salvador take bitcoin and exchange it for USD? Will it eventually issue its own central bank digital currency (CBDC)? Given the volatility of cryptocurrencies today, will the CRB take steps to hedge against massive price movements?
One solution that could offer more long-term stability to the national economy would be for the CRB to create a stablecoin – a token pegged to and backed by a reliable underlying asset – against its own reserve of bitcoin, and issue that same stablecoin for use as a form of payment. This solution would be similar to a CBDC, essentially a tokenised version of the national currency, but would give the government the possibility of amending the peg should circumstances such as major price swings require it to take action to protect its economy, giving it some degree of monetary control.
With many other potential challenges ahead for this first-of-its-kind experiment, it is clear that policymakers all over the world will pay close attention to how the Latin country goes about tackling them. El Salvador may be the first country to take this leap but, given the noises from several other nations, it may very well not be the last.