El Salvador’s bold move to accept Bitcoin as legal tender has Wall Street once again wondering whether a cryptocurrency could really ever replace the old-school dollar.
It’s a question that had appeared, at least to some, to already be nearly answered, after a handful of trailblazing companies — including Tesla Inc., MicroStrategy Inc. and Square Inc. — incorporated bitcoins into their balance sheets without igniting a broader corporate revolution. Now, the focus is turning to governments.
El Salvador, which started using the U.S dollar as its currency more than 20 years ago, last week became the first country in the world to pass legislation allowing use of bitcoins in any transaction. President Nayib Bukele says the point is to counter the fact that relatively few citizens have bank accounts and to cut the cost of sending remittances, such as money workers ship back to their families in El Salvador from other countries.
Some observers wonder whether a bigger movement is afoot: replacing a conventional currency — the dollar, the titan of global commerce and finance — on a national scale and then beyond.
The answer, at least for Julian Sawyer, chief executive officer of Bitstamp, one of the world’s longest-running crypto exchanges, is not quite yet.
“There’s been a lot of people who have sat in the crypto world who’ve said, ‘Oh, crypto is going to take over the world and traditional banks and central banks will go away,’” he said in a telephone interview from London. “That’s not going to happen.”
While the technology itself may be used increasingly in the behind-the-scenes plumbing of financial services, such as money being sent across borders, Sawyer said Bitcoin is still too volatile to fully replace the dollar — though it may become part of the mix.
“Will there still be the dollar? Yes,” he said. “Will there still be Visa and Mastercard? Absolutely. It will just be we’ll have alternatives for using plastic, or paper, or coins or checks.”
El Salvador’s central bank president also said on state television that bitcoins would not replace the greenback in the nation.
The dollar is stable, especially when compared with the explosive price moves of bitcoins. And whereas the dollar usually fluctuates for mundane reasons, cryptocurrencies can be swayed by tweets, memes and Elon Musk — not a great fit for a national or global currency. The value of bitcoins quadrupled last year, while the Bloomberg Dollar Spot Index slipped 5.5% — a fairly big number for the greenback. Since mid-April, bitcoins have lost nearly half of their value.
Bank of America Corp. research shows bitcoins is about four times as volatile as the Brazilian real and the Turkish lira, and neither of those is anyone’s model of stability.
“Bitcoin injects extra volatility,” which is counterproductive for countries looking for stability, said Marc Chandler, chief market strategist at Bannockburn Global Forex. “Why do countries peg their currency to another currency or have a currency board or have a dollarized economy? It’s because their currency has become too volatile or lost credence in the market and become out of control, very inflationary.”
That doesn’t mean other countries won’t look to El Salvador as a test case for what can happen, especially those that benefit from remittance flows or have central banks already researching or piloting cryptocurrencies of their own.
“Countries can’t just look away from this option now,” said Valkyrie Investments CEO Leah Wald, who previously worked for the World Bank. “For the longevity and health and well-being of Bitcoin, and the Bitcoin network, this is the dawn of a new day.”
Nations from Haiti to Guatemala, South Sudan and Liberia could be next to adopt bitcoins given their dependence on remittance inflows, high poverty and low financial inclusion, according to Rahul Shah, Tellimer Ltd.’s head of financials equity research.
Other dollarized economies — those, like El Salvador, that are based on the greenback — are also candidates to officially adopt bitcoins and become less dependent on the Federal Reserve and U.S. policies.
“It potentially gives the ability to not be as beholden to the dollar over the long term, and be more independent of the existing financial system,” said Brad Bechtel, global head of currencies at Jefferies. “Once you see one country go that way, it wouldn’t surprise me to see more.”
Ecuador, which has been dollarized for two decades, could also consider bitcoins, said Emily Weis, a global macro strategist at State Street Corp. Colombia and Mexico, meanwhile, would risk disrupting their local currencies, even if they have large remittances and cryptocurrency interest among the local populations, she added.
Many emerging market populations “already have an affinity for cryptocurrencies given capital controls, fragile local market dynamics and volatility of local currencies,” Weis said.
There are also the related business opportunities: El Salvador’s Bukele, for example, is using the new law as a way to stoke interest in mining bitcoins in the coastal country. He ordered the president of the state-owned geothermal electric company to make plans to offer greener mining facilities.
“All it takes is one small domino and eventually it can create real change,” said Alex Tapscott of Ninepoint Partners LP, which operates a bitcoin ETF in Canada.
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