El Salvador: In a Bit(coin) of Trouble?
In this commentary, we explore the benefits and costs of El Salvador's bet on bitcoin. In June 2021, El Salvador became the first country to authorize the use of bitcoin as legal tender alongside its official currency, the U.S. dollar. El Salvador’s experiment is being watched with a mix of interest and skepticism, as governments and other market participants consider both the opportunities and risks associated with cryptocurrencies and the underlying technologies. A second country, the Central African Republic (CAR), has already followed suit, adopting bitcoin as legal tender alongside the CFA Franc. Although we believe some of the criticisms of El Salvador's bitcoin policy are overstated, this is due primarily to the limited progress in increasing bitcoin usage thus far. In our view, Cryptocurrency adoption within small economies like El Salvador and CAR increases exposure to a highly volatile asset class and brings substantial risks. Some of the broader policy and financial implications for sovereign governments will be explored further in a separate commentary that we plan to publish later this month.Key Highlights
• El Salvador's efforts to promote bitcoin adoption have had a limited impact. The benefits of digitization could be achieved without formally adopting a cryptocurrency.
• The policy has had a fiscal cost that El Salvador can ill afford, particularly given other fiscal and governance challenges.
• The rationale for adopting bitcoin remains unclear and may ultimately increase the risk of money laundering and corruption. Government policies toward bitcoin and other cryptocurrencies will have significant implications for the development of cryptocurrency markets.
"El Salvador's bitcoin experiment has aggravated the government’s current financial challenges," notes Thomas Torgerson, Co-Head of Sovereign Ratings. "Cryptocurrency adoption by small and poor countries brings additional risks and is unlikely to yield any meaningful benefits."
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