Bitcoin has become El Salvador’s legal tender, does it matter?

Responding to the recent formalisation in El Salvador of Bitcoin as legal tender, cryptocurrency and finance expert Hirbod Assa, Senior Lecturer in Finance and Fintech in Kent Business School, explains if this may influence the rest of the world financial economy. He said:

‘El Salvador is now the first country to accept Bitcoin as legal tender; but does it really matter?

‘As a small economy, El Salvador’s move has no significant impact on the world economy. However, the main question is if this can trigger similar moves in other larger economies like the US and UK.’

‘Bitcoin is a cryptocurrency based on blockchain technology designed to be secure and transparent, making any transaction tractable on a non-centralized network that removes almost any risk of fraud, money-laundering, and illegal transactions. Since cryptocurrencies are not controlled by any central bank, it is also argued that central authorities cannot manipulate money.

‘Though Bitcoin can continue to be the most important virtual asset and a means of payment, but it seems there are some issues that make it very unlikely for bitcoin to replace centralized currencies of the larger economies.

‘The main issue is that central banks use monetary policies as the anchor of the economy. Inflation targeting, which so far has proven to be the most effective policy to stabilize the economy, is impossible to practice with cryptocurrencies. On the contrary, cryptocurrencies so far happen to be very volatile.

‘Furthermore at the macroeconomic level, monetary policies can mitigate the impact of the economic shocks (such as the 2008 financial crisis and Covid-19) by borrowing from the future to pay for the distressed economies of today. This is a role bitcoin cannot play.’

Hirbod Assa, Senior Lecturer in Finance and Fintech, Kent Business School