The Fate of Crypto as a Form of Legal Tender | A Brief Look at Latin America

Since 2019, trading crypto-currency has officially been banned in China. It has, however, continued online through foreign exchanges. While China chooses to crackdown on crypto, a country like El Salvador is welcoming it with open arms.

China, with its relatively low electricity costs and cheaper computer hardware, has long been one of the world’s main centres for mining. The Chinese government has tried to ban cryptocurrencies multiple times; citing concerns of gambling, fraud and money laundering. In 2019, the country stopped not only the mining of crypto but also its use.

Legal tender is any coin, banknote or its equivalent that can be accepted if offered for payment. Bitcoin, so far, has existed either as internet money or as ‘property’ in the eyes of most jurisdictions. El Salvador set the precedent for countries to accept crypto as legal tender. Prior to this move, the country used was using the greenback for its local economy.

Currency substitution is the use of a foreign currency in parallel to or instead of a domestic currency— typically the currency of a dominant trade and investment partner. At the moment, three Latin American countries, all of which have signed on with the U.S. dollar, fit into the category.

Dollarization is the term for when the U.S. dollar is specifically used in addition to or instead of the domestic currency of that particular country. The three Latin American economies of Panama, Ecuador, and El Salvador are officially dollarized, while Peru is semiofficially dollarized. Within the three officially dollarized countries, real GDP growth has been more stable in comparison to the emerging economies that issue their own domestic currencies.

In El Salvador, merchants can now accept Bitcoin similar to how they once accepted US dollars. As such, Nayib Bukele, the President of El Salvador, seems pumped on the promise of what the asset can do. “We not only want to support it [bitcoin], but we want to demonstrate that the world can benefit from it,” he said. “El Salvador is not only a country anymore. It is a symbol of what bitcoin can do.”

In 2021, El Salvador marked the 20th anniversary of the dollarization of its economy. It was on this date that the government made the bitcoin legal tender. Chivo is the bitcoin wallet launched by the El Salvador government to facilitate cheap and efficient payments using bitcoin’s Lightning Network (LN).

Mobile-payment technologies took off during the pandemic. Ecommerce platforms such as Argentina’s Mercado Libre with Mercado Pago in Latin America saw their presence grow in emerging markets where credit-card penetration is lower than in economies with a more developed financial system. Emerging markets are also drawn to CBDCs and cryptocurrencies as they are able to facilitate cross-border transactions with few to no fees.

There are many reasons why emerging markets will be crucial to determining the fate of crypto as a form of legal tender. Due to the large segments of the population who do not have access to traditional banking facilities, higher banking risks and, on average, lower bank and credit-card penetration rate, the adoption of a CBDC or cryptocurrency could potentially be highly beneficial in emerging markets.

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