Experts weigh Bitcoin’s impact on El Salvador’s economy: it cannot get worse

El Salvador, at the legislative level recognized Bitcoin as a means of payment, has created a precedent for other states. For the country itself, this move could bring both an inflow of investment and a capital outflow. This was stated by experts polled by ForkLog.

Professor Evgeny Kogan of the Higher School of Economics believes that the law poses nothing harmful to the country’s economy. He recalled that previously El Salvador had attempted to introduce its own national currency, but abandoned the idea because of “extreme inflation”.

“70% of El Salvador’s economy is a shadow economy, and the most serious industry, if one can say so, is tied to marijuana trafficking. Therefore this move may not just be a PR stunt, but a fairly solid solution for them, because things can’t get worse, and getting better is quite possible,” the economist said.

Kogan did not rule out that recognizing Bitcoin as an official means of settlement could attract cryptocurrency investments to the country.

Head analyst at Exante Yanis Kivkulis suggested that El Salvador would become an experimental testing ground for the US to observe the integration of digital currencies into the traditional economy. In his words, there is a possibility that the government has heavily invested in the first cryptocurrency and wanted to give it growth impulse.

The news from El Salvador indeed became a trigger for Bitcoin’s price rise, agrees Six Nines data-center head Sergei Trosin:

“But it wasn’t Bitcoin that jumped, it has finally returned to a normal price after a fall. Bitcoin would have recovered from the drop without El Salvador.”

Until the law comes into force, its impact on the country’s economy is hard to assess. The process of technical implementation of settlements remains unclear.

“If Salvadorans really reach the stage of actual project implementation, they will surely attract many specialists from the US and other countries. It is likely that Bitcoin will be used to settle debts as well as to pay for goods and services,” said Yanis Kivkulis.

Ordinary Salvadorans may not notice the innovations if Bitcoin is used to move financial flows from other countries, bypassing it through the banking system. This scenario, according to the expert, implies the creation of offshore zones using digital gold.

Sergei Trosin is skeptical about the chances that other states will follow El Salvador’s example:

“Many will wait to see what happens to the economy next year. On the other hand, someone had to start.”

Currently, 70% of Salvadorans do not have access to traditional financial services and rely heavily on remittances. According to World Bank data, funds that citizens receive from family members living in the United States amount to a fifth of GDP.

Since 2000, the dollar has been recognized as legal tender in the country.

Currency analyst [simple_tooltip content=’Canadian Imperial Bank of Commerce, одна из крупнейших банковских компаний в Канаде’]CIBC[/simple_tooltip] Bipin Rai, in комментарии Financial Times called the law a “bad idea”.

“Essentially, in El Salvador there will be two currency regimes, neither of which will be controlled,” he said.

Experts noted Nayib Bukele’s penchant for bright and unexpected statements, which could jeopardize the IMF agreements previously reached by the country.

“Plans for Bitcoin under an authoritarian regime will likely only worsen concerns about corruption, money laundering and the independence of regulators,” said Shivon Morden, a top executive at the American broker Amherst Pierpont Securities in a client note.

The Salvadoran government will create a trust at the local Development Bank to ensure automatic conversion of Bitcoin into dollars.

“The transition to Bitcoin-based settlements will temporarily increase the money supply and raise El Salvador’s economic activity. However, subsequently it will cause inflation and interest-rate rises,” warned Gabriela Siller, head of the Economic Analysis Department at Banco Base.

Overall, experts agreed that this step would have a limited impact on El Salvador, given the size of the economy. However, if the experiment succeeds, other large remittance markets, including Mexico, will surely take an interest, they added.

El Salvador is not the first country to seek to integrate the leading cryptocurrency into its economy.

Back in 2017, Japan’s cabinet recognized cryptocurrency as equivalent to property value. It could be used to purchase goods and services, but it was not legal tender.

The following year, after the Coincheck exchange hack that stole over $500 million in NEM cryptocurrency, Japan’s Financial Services Agency proposed treating crypto assets as financial instruments.

In 2018, Germany’s finance ministry recognized Bitcoin as a settlement unit. However, since 2020 authorities classify digital assets as financial instruments and do not regard them as legal tender.

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