There are many discussions about cryptocurrencies; today, we would like to talk a little about Bitcoin’s prospects of ever becoming a legal payment method. In Salvador, BTC has been legalised for a year now; in this article, we would like to tell you about the consequences of this decision on the country’s economy and citizens.
The Reserveum project is scrutinising all the pros and contras of crypto projects to find an ideal balance and create an effective currency.
One of the reasons to introduce Bitcoin as the official national currency is that 23% of Salvador’s GDP is in money transactions. The thing is that a huge part of the country’s population works abroad and sends a part of their income to their families in Salvador. In 2020, the transfers to Salvador from other countries amounted to 5,9 billion USD – a record high among all the countries. So, bank commissions for transactions are a huge problem, and they tried to solve it by introducing cryptocurrencies.
Switching to Bitcoin helped save up to 98% on commissions, but there was an instant strike from the other side. When the Bitcoin price started falling down, Salvador lost 2 mln USD on the first day, even when the BTC price was around 50’000 USD per coin. Naturally, it started an uprising in the country.
These events were preceded by another experiment that was made in the Salvador village of El Zonte back in 2019. An anonymous person donated 100’000 USD worth of Bitcoins to the village as long as all of the villagers switched to the circular economy based on BTC. Since most of the villagers had no idea whatsoever what Bitcoin even was, the importance of this project was clearly overestimated by the government.
Why was it a bad idea to make Bitcoin an official currency?
The first mistake of El Salvador authorities was that they showed too much trust in the market currency with a highly fluctuating rate. Cryptocurrencies are first of all speculative assets, their rates are too fluid and affected by unpredictable events; making a whole economy dependent on that kind of market was truly reckless.
The second mistake was that the people of Salvador were absolutely not prepared for such kind of change. Any new technology, especially money-related, needs a proper preparation for its future users, and a gradual implementation of new solutions into their everyday lives so that they had time to figure everything out. In this case, the people of Salvador turned out to be financially and technologically illiterate; some parts of the country even have limited or no internet, so no wonder.
We are so immersed in the crypto world so it’s hard to imagine that some people are not familiar with this world full of wonders. If you’re on the same page with us, we would advise an article called “Perfect Currency for Metaverses”.
The third mistake was the lack of transparency in the Chivo platform used by the Salvador authorities for Bitcoin circulation. Chivo belongs to a private company, so no information on it is available to the general public. This makes the whole project very suspicious, as there may be any fraud schemes performed in Chivo.
And of course, the use of anonymous currencies in third-world countries implies rise in criminality. Money laundering, tax evasion, transnational crimes, the slave trade – all the problems already present in El Salvador became even worse with Bitcoin.
How can we use this experience?
It is better to learn from other people’s mistakes, so we can thank Salvador for taking the first shot. Now we can study the situation in detail and do everything we can to prevent making the same mistakes.
First of all, an effective currency serving an economy of a full country should not be loose like a weather vane in a strong wind. Yes, cryptocurrencies are decentralised, but it doesn’t mean they can’t be controlled. A token can be managed by a smart contract – an algorithm that has provided for all of the possible problems and has built-in mechanisms to solve them.
Secondly, such a complex product as cryptocurrencies should not be pushed to be used by every user. It is better to keep it as an alternative, giving users an opportunity to estimate the advantages of crypto coins compared to fiat money. But one should be prepared for a situation when the user audience of high-tech specialised products is limited to a bunch of enthusiasts.
Thirdly, a platform should not only be transparent, but it should also let users take part in managing the cryptocurrency. In the Reserveum project, such an opportunity is built into the algorithm, and all the token users can take part in important decisions.
So far, we haven’t found a solution to our token being used in the shadow economy, but if you have any ideas on that – welcome to our project!
According to the analysis group findings: reserveum.org