Bitcoin as Official Legal Tender: Extravagance or Necessity?

According to a Thursday Bloomberg report, a team of analysts at JPMorgan suggested that Bitcoin is showing steady downtrend signs despite its recent moderate price recovery. The analysts explained that, apart from known legal concerns in several countries including China, Bitcoin’s relatively depressed share of total crypto market value is another trend to observe seriously and said, “We believe that the return to backwardation in recent weeks has been a negative signal pointing to a bear market," they wrote in a note.

However, Bitcoin is now officially legal tender in El Salvador, a country in Central America with a population of 6.5 million and a GDP of about $27 billion, as of 2019 (2020 was off due to the Covid-19 impact on the global economy). This can make a big difference for the entire crypto-sector. True, many countries over the past couple of years reiterated their intent to introduce sovereign cryptocurrencies – the move, under more detailed review, which has nothing to do with crypto industry development from a decentralization standpoint. This is why, until recently, global think tanks and major regulators such as IMF and BIS remained cool on that.

However, the International Monetary Fund said on Thursday it has economic and legal concerns regarding the move by El Salvador to make bitcoin a legal tender, contradicting meaningful cooperation and further prospects for an IMF-backed program in that country and impairing investment quality of the country's bonds. Reuters cited Gerry Rice, an IMF spokesman, who said during a scheduled press briefing: "Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis”. "We are following developments closely, and we'll continue our consultations with the authorities."

Okay, if we are facing nothing more than a valid concern over outcomes of the IMF programs and bond valuations – that’s one thing. However, if the IMF meant something more serious by phrase “legal concerns” – namely, that Bitcoin won’t be welcomed as a part of the global currency exchange domain – that could represent a much more challenging situation for El Salvador.

However, one way or the other, Bitcoin is now everyone's focus again, meaning such considerations as its share in the crypto market, rightfully mentioned by JPMorgan analysts, become very much secondary. Indeed, many global companies accepting Bitcoin as payment might be interested in setting up their headquarters in El Salvador since banking relationships in the country will be easier, and foreign exchange operations into and from Bitcoin will be exempt from tax liabilities. This would be a game changer.

The COVID-19 pandemic heavily impacted El Salvador’s small economy which had struggled even before the COVID crisis, following a civil war that ended in the 1990s. Like many other minor nations, El Salvadorian economy substantially depends on foreign remittances of its citizens working abroad, which totalled over 20% of GDP in 2019. Very few other countries rely more on such remittances outside of Haiti, according to a WSJ article published in 2020.

Currently, remittances are preemptively carried by Western Union or other money transfer services which are necessarily centralized, while implying paying out handful commissions and being regulated almost like brick and mortar banks. Sending funds can be complicated, involving an in-person visit to an agent’s office and proof of identity for both the sender and receiver. Although there are reportedly over 500 Western Union offices across El Salvador, those living in remote rural areas are particularly heavily restricted.

By contrast, cryptocurrencies like Bitcoin will enable anyone with a connected mobile phone to send or receive funds, regardless of location. Personal crypto wallets, as we know, are safeguarded inside locked smartphones and protected by passwords and/or biometrics like fingerprints or face recognition. For El Salvador to readily give up on this idea under external pressure, international financial organizations will have to offer something comparable as a replacement – like joint efforts in development of the country’s own public banking system, which sounds very unlikely.

So far, based on the recent developments and their far-looking consequences, Bitcoin has improved, rather than deteriorated, its outlook, so we will stay tuned.