By: Adrian Mosqueda, October 19, 2021
Last month El Salvador became the first country to recognize Bitcoin as legal tender. The decision has faced a wide array of opposing opinions. Supporters identify the benefits such as providing a viable alternative for those that do not have access to traditional banking solutions. However, the decision has also been heavily criticized by those that consider the move too risky because of the volatile nature of the cryptocurrency. Some business owners also express concerns regarding their poor understanding of the “virtual currency” and how to implement it in their daily transactions. But what does this revolutionary implementation mean for the global financial landscape?
Due to international commercial law, Bitcoin is also authorized as legal tender under all the treaties where El Salvador is a member. This could bring serious implications in the way international corporations conduct business with El Salvador-based businesses. For example, businesses outside of the country could be required to find a way to pay with bitcoin to vendors in El Salvador. Undoubtedly, this will cause one of two outcomes. Either Bitcoin will be implemented in some capacity by these businesses, or they will find somewhere else to obtain the same goods. The first scenario could lead to an even wider acceptance of bitcoin ultimately benefiting those who favor it. The latter outcome is surely the least desired by Salvadorean business owners who heavily rely on international transactions to stay afloat. The domino effect will negatively affect the country’s economy and will cast even more doubts on the government’s decision.
This decision’s far-reaching effect can also influence the way the United States views this emerging industry. For example, United States regulators have tried to implement existing rules for businesses and individuals who deal with virtual currencies like Bitcoin in the last decade. The fact that now Bitcoin is recognized as legal tender in a jurisdiction directly contradicts language from some U.S regulators. For instance, the Financial Crimes Enforcement Network (FinCEN) described virtual currencies as currency that have no legal tender statute in any jurisdiction. That determination directly determined the level of disclosures and rules that businesses and individuals dealing with in this industry had to comply with. If Bitcoin is now legal tender under some jurisdiction, U.S regulators may take a position of applying rules that have traditionally only been applied when dealing with traditional currencies.
The World Bank has stated that it could not help El Salvador in adopting bitcoin “given environmental and transparency shortcomings.” However, the World Bank seems to be trying to create its own cryptocurrency to stay relevant. Although it is too early to see what that looks like, there is a risk of a more centralized structure compared to Bitcoin. For example, the public could be forced to acquire this new cryptocurrency directly from banks and restrict the usage of third-party crypto sites. Whether it is with Bitcoin, or with a new solution, the current financial system is evolving to adapt to current trends. Hopefully, innovation will consider those who have traditionally been left behind by the banking world and give them an equal chance in the system.
El Salvador’s move can start a domino effect in global financial institutions. Although El Salvador is a small country, if some other countries adopt a similar position regarding Bitcoin, we could see a huge impact on the global financial landscape. Other countries from South America seem to be already considering the adoption of Bitcoin. If the adoption in a small country is having a significant effect, any number of countries that follow will create a sea of changes worldwide. Even if some other jurisdictions do not adopt Bitcoin as legal tender, they might develop their own virtual currency. Although Bitcoin and other cryptocurrencies rightly bear a bad reputation due to volatility and even their environmental impact, they are on their way to becoming the backbone of the global financial structure.