Economy

Experts divided on El Salvador’s plan to adopt Bitcoin

Bitcoin highly speculative, works poorly as medium of exchange, one expert tells Anadolu Agency

Ovunc Kutlu   | 08.06.2021
Experts divided on El Salvador’s plan to adopt Bitcoin FILE PHOTO

ANKARA

Experts are divided on El Salvador's adopting Bitcoin as observers cite its use in money laundering and illicit transactions against a long-term opportunity against current macroeconomic conditions.

"[El Salvador’s President] Nayib Bukele’s plans are not workable," Alistair Milne, who teaches financial economics at the School of Business and Economics at the UK's Loughborough University told Anadolu Agency via email.

"Making Bitcoin legal tender does not change the situation, it does not force anyone to accept Bitcoin in exchange for goods and services," he said.

El Salvador early Wednesday approved the adoption of leading cryptocurrency Bitcoin as legal tender, the president announced.

"The #BitcoinLaw has been approved by a supermajority in the Salvadoran Congress. 62 out of 84 votes! History! #Btc," Nayib Bukele, president of the small Central American country, wrote on Twitter just after midnight local time.

Milne said Bitcoin's major issue is that it currently works poorly as money for a medium of exchange, and it is very difficult for it to be accepted for mainstream transactions, on top of holding it as a store of value since its price fluctuates widely.

"All legal tender would mean is that Bitcoin could be used to pay taxes (a debt to the government) or court-ordered payments (debts to private creditors), but there would still be problems in framing the law because the debts would be in Salvadorian dollars and the law would have to determine somehow the relevant exchange rate," he said.

But other experts are excited to see El Salvador becoming the first country in the world to formally adopt digital currency.

"This is a big step for Bitcoin and cryptocurrencies as this is the first time a nation-state has approved cryptocurrency as legal tender," Gavin Brown, Financial Technology associate professor in Accounting and Finance Department at the UK's University of Liverpool.

"Perhaps, more importantly, the signaling impact of such a strategic move by a nation-state, albeit a small one, is important in the creeping adoption of cryptocurrencies. This is particularly important as larger nations accelerate their research into central bank digital currencies [CBDCs] to generate the fiat currency of tomorrow and to mitigate the threat from decentralized currency alternatives such as Bitcoin," he said, also by email.

Brown said any additional demand from countries would drive the equilibrium price upwards since Bitcoin has a limited supply of 21 million.

"Moreover, El Salvador has signaled that it will add Bitcoin to the balance sheet of its Central Bank, essentially using Bitcoin as a treasury reserve asset. This has already been done by Tesla and other corporates but never before by a nation-state," he added.

Tesla CEO Elon Musk wrote Bitcoin on his Twitter profile page on Dec. 29, pushing its price to more than $38,000 in a single day. Tesla announced on Feb. 8 that it bought $1.5 billion worth of cryptocurrency and would begin accepting it as payment for its products.

While the company's first-quarter financial statement showed it sold $272 million of Bitcoin before March 31, Musk said on May 12 the American electric carmaker suspended vehicle purchases using Bitcoin because of environmental concerns, which has caused high fluctuation and a steep price decline.

Because Bitcoin and other cryptocurrencies are decentralized, they are not yet regulated, which makes them very open to speculation and manipulation.

"The principal use of Bitcoin is speculation, evading currency controls, money laundering and illicit transactions on the dark web and elsewhere," said Milne. “Because no identity is involved, [it is] very difficult to prevent such usage ... I envisage it merging into mainstream markets, no longer regarded as a separate asset class at all. Just an alternative technology for holding bonds, equities and other financial assets," he said.

Milne believes that speculation on crypto prices will come to an end and warned that investors who would come late to the market would lose money.

Brown, on the other hand, believes the crypto market provides a reasonable long-term buying opportunity against tough macroeconomic conditions currently seen, such as near negative yields, lower-for-longer base rates and unprecedented quantitative easing.

"An allocation of crypto to a diversified portfolio of 1-2% weighting may be a sensible allocation to be considered by investors. However, volatility will likely be persistent in this nascent asset class, so a Bitcoin/altcoin investment must be done with research and forbearance to ride the ups as well as the downs," he said. "Much of the future success of crypto, or not, maybe reliant on what the future money will look like. It is shaping up to be a three-way contest between cryptocurrencies, CBDC, and corporate-issued currencies such as Facebook's Diem.”

After climbing to an all-time high of $64,000 in April, Bitcoin has since lost almost half of its value, trading around $33,000 on Tuesday.

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