Tough Start for Bitcoin as Legal Tender

El Salvador’s experiment using bitcoin as legal tender had a rocky start, as its price crashed on its first day as legal tender, while the rollout was hampered by technical glitches.

The cryptocurrency plunged as much as 17 percent, to its lowest level in a month, before paring losses, amid news that the government disconnected its bitcoin wallet early on Tuesday to fix problems and announced it was running tests to make the currency available for download later in the day. El Salvador President Nayib Bukele said his country had taken advantage of the crash to “buy the dip,” adding 150 coins to take its total holding to 550, worth about $26 million. The Bloomberg Galaxy Crypto Index, which tracks some of the largest cryptos, lost as much as 19 percent, while other smaller digital assets were also sold off.

El Salvador’s plan represents the biggest test for bitcoin in its 12-year history. Both enthusiasts and detractors of crytocurrencies are monitoring the experiment to see whether a significant number of people want to transact with bitcoin when it circulates alongside the U.S. dollar, and whether it brings any benefits to the violent, impoverished Central American nation.

If the experiment is a success, other countries may follow El Salvador’s lead. Its adoption will get an initial boost from the government’s bitcoin wallet, Chivo, which comes preloaded with $30 worth of the currency for users who register with a Salvadoran national ID number. Bukele’s administration has installed 200 bitcoin ATMs around the country, which can be used to exchange the cryptocurrency for U.S. dollars. The Finance Ministry created a $150 million fund at state-run bank Banco de Desarrollo de la Republica de El Salvador, Bandesal, to back the transactions.

Businesses will be required to accept bitcoin in exchange for goods and services, and the government will accept it for tax payments. The plan is the brainchild of El Salvador’s 40-year-old president, who says it will draw more people into the financial system and make it cheaper to send remittances.

Twitter users on Tuesday reported being able to pay for services, such as breakfast at McDonald’s, with bitcoin. Still, the dollar will remain the national currency for public accounting purposes, and merchants who are technologically unable to receive the e-currency will be exempt from the law, the government has said. El Salvador’s dollarized economy is heavily reliant on remittances sent home by migrants overseas, which totaled US$6 billion last year and account for roughly a fifth of GDP. Bukele says bitcoin could save Salvadorans $400 million a year in fees for these transactions.

“This is brave new world stuff,” said Garrick Hileman, head of research for the London- and Miami-based Blockchain.com. “We are in uncharted waters with this launch, but I’m glad to see this experiment happen overall, and I think we’ll learn a lot from it.”

Widespread Public Skepticism

While Bukele himself enjoys approval ratings of more than 80 percent, a poll last week by El Salvador’s Universidad Centroamericana Jose Simeon Canas found that his bitcoin law is widely unpopular. Two-thirds of respondents said the law should be repealed, while more than 70 percent said they prefer to use U.S. dollars instead.

The International Monetary Fund (IMF) warned in June of the risks of using bitcoin, which lost nearly half its value from April to May, and the World Bank declined a request from El Salvador’s government to help with the adoption, citing environmental and transparency drawbacks. The bitcoin news also helped trigger a selloff of El Salvador’s dollar bonds, though they have since pared losses.

See also:

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“Crypto is sexy but untested and complicated, especially for a country like El Salvador,” Stifel Nicolaus & Co. managing director Nathalie Marshik said. “It’s extremely risky, and there is the question of: Is the Bandesal fund big enough? The regulations look like the law, put together really quickly. It’s a big question mark.”

While the Bahamas launched its own central bank–backed digital currency this year, the “sand dollar,” and Venezuela has its own e-money called the petro, these are very different from a decentralized cryptocurrency such as bitcoin, whose users value its independence from governments and central banks.

Other governments in the region will be watching closely. Last month, Cuba moved to legalize cryptocurrency already being used on the island, while lawmakers in other countries such as Panama and Uruguay have proposed similar legislation.

Bitcoin’s adoption comes as the El Salvador’s top court, presided over by Bukele allies, ruled last week that the president can run for a second term. The U.S. criticized the decision and said it damages bilateral relations between the two nations.

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