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The Shot Heard Around the World: Will Other Countries Follow the Path Taken by El Salvador?

Denis Goncharenko

On June 9, 2021, El Salvador became the first country in the world to recognize Bitcoin as an official means of payment. The cryptocurrency will become a legal payment method in the country, along with the US dollar. In the near future, the law is to be signed by the President of Salvador Nayib Bukele, and the country's authorities have 90 days to create a payment infrastructure.

Is accepting Bitcoin as a payment instrument a spontaneous decision or a deliberate move? How will this turn out for the population of the country, investors and El Salvador itself? Is this really a global solution for the financial market in general and the crypto market in particular, and will other countries follow the path taken by El Salvador?

Bitnewstoday tried to find answers to these questions by asking the opinions of various experts and interviewing market participants.

Political marketing or a long and happy marriage with Bitcoin?

The Guardian cites the opinions of experts who do not share the enthusiasm of President Nayib Bukele.The law on recognition of Bitcoin by El Salvador as an official means of payment David Morales of the human rights group Cristosal considers "political marketing."

«It was an idea that occurred to the president and became law within hours. This kind of important decision is made as part of a marketing strategy, instead of having a real national debate».

Padre José María Tojeira, director of the Human Rights Institute at the University of Central America, agrees with him, and he is confident that very few Salvadorans will have the technical ability to access Bitcoins:

«The decision is rather incomprehensible. It seems more about making a show – which is a characteristic of this government: lots of propaganda, but few structural changes to help the impoverished population».

Russian financial market participants share the opinion of their foreign colleagues. Dmitry Machikhin, CEO of Pressman capital, notes that the Salvadorian authorities seem to have lagged behind the common understanding of Bitcoin by four years, when the general trend was to treat it as a means of payment. However, there is also evidence that preparations were made for the legalization of Bitcoin in El Salvador and the decision was not spontaneous.

According to Forbes, the Salvadoran marriage with Bitcoin took two years to prepare. Bitcoin entrepreneur Jack Mallers, who helped build the Lightning Network to facilitate fast, low-cost Bitcoin transactions, is working with President Bukele and other Salvadorans to make cryptocurrency a possible means of payment for everyday purchases.

Mallers is working to get El Salvador into active use of its Strike smartphone app, a Venmo counterpart or the Lightning-based Cash App. In 2019, thanks to an anonymous donation, crypto entrepreneurs founded Bitcoin Beach to experience El Salvador's closed Bitcoin economy, in which residents and businesses transact entirely in bitcoins without converting to and from US dollars.

Another crypto entrepreneur, Adam Back from Blockstream, is also driving the adoption of Bitcoin in the country, who told CNBC that he plans to implement technologies like Liquid, which, like Lightning, can speed up Bitcoin transactions and satellite infrastructure to make El Salvador a model for the world. Satellites can help villagers in El Salvador connect to the internet, and therefore the Bitcoin network, in places where terrestrial connectivity leaves a lot to be desired.

Investors can get rich and lose everything the very next day

«El Salvador's decision is aimed at increasing the attractiveness for investors. When you don't have your own financial system, you don't care what your citizens pay – in dollars, euros or Bitcoins. The more instruments there are, the more potential business and investor loyalty is,» said Ilya Anikin from SH Capital.

However, Bitcoin is extremely volatile, which means that investors risk becoming rich and poorer the very next day, The Guardian cites the opinion of Carlos Carcach, a professor at El Salvador’s Superior School of Economics and Business:

«The adoption of the cryptocurrency was neither necessary, nor convenient … as long as there is someone who accepts payment with Bitcoin, the same as they accept dollars, there wouldn’t be problems».

Dmitry Machikhin notes that Bitcoin is quite suitable for savings and diversification, but its principle of operation does not allow for efficient and quick settlements.

Prospects for El Salvador: very cautious optimism

Analysts are cautious about the consequences of the law to legalize bitcoin in El Salvador. Nigel Green, chief executive of the financial consultancy deVere Group in a comment to The Bangkok Post, agrees that the decision is obviously brave:

“Some larger, more powerful countries are trying to quash or slow the inevitable shift to borderless, global, digital currencies. But this small Central American nation has embraced the biggest one of them all – Bitcoin.”

Susannah Streeter, financial analyst at Hargreaves Lansdown, told AFP that «There is a risk El Salvador could simply become an island in a global sea of scepticism about the cryptocurrency», but at the same time, the expert adds, «by becoming known as a Bitcoin haven, the country (El Salvador), which has already faced serious issues with corruption, could attract the wrong kind of investment».

Some financial analysts also say the move could complicate negotiations with the IMF, where El Salvador is pushing for a program worth more than a billion dollars.

Bitcoin: weak growth

Against the background of the news about the legalization of Bitcoin in El Salvador, the cryptocurrency, which had previously experienced a significant drop, has strengthened somewhat: over the period June 8-9, Bitcoin grew from 32,000 to 34,000 dollars, today the price rose to 36,900, now there is a downward correction. Experts admit that the situation in El Salvador influenced the growth in the value of the cryptocurrency, but do not believe that this impact will be significant or any long-term.

Passive observers or followers?

Will El Salvador become an example for other countries? In most cases, experts agree that other states will be watching what is happening for the time being, while at the same time building alternative systems, for example, state stablecoins against existing cryptocurrencies. However, the governments of different countries will not be able to categorically refuse to use cryptocurrencies in one form or another; at the macroeconomic level, this refusal does not bring anything good, this can cut off the country from the world turnover.

«While El Salvador's move will be the first, things probably won't stop there. When we think of nation states and central banks researching digital currencies, we are not surprised that countries that have historically relied on the dollar, or people who have experienced hyperinflation, are exploring the potential merits of digital currency,» CEO of Grayscale Investments Michael Sonnenshine said in an interview with ETF Edge.

But no one undertakes to give accurate forecasts.

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