Reuters – El Salvador bought its first bitcoins, President Nayib Bukele said on Monday, an announcement that pushed the cryptocurrency’s price up a day before the country formally adopts it as legal tender alongside the US dollar.
Bitcoin was up more than 1.5% Monday night at $ 52,700, data from Refinitiv Eikon showed, and a Reuters analyst earlier said it was on track to fluctuate between $ 56,000 and $ 56,300.
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Bukele reported in two different messages on his Twitter account that the country had acquired 400 bitcoins as of Monday afternoon. The president said: “Our brokers will buy much more as the deadline approaches”
El Salvador will legalize bitcoin on Tuesday, a measure that the president says will save Salvadorans living abroad millions of dollars in commissions on the money they send home.
But polls show Salvadorans are skeptical about the use of bitcoin and wary of the cryptocurrency’s volatility that critics say could increase financial and regulatory risks for financial institutions.
Here are some of the pros and cons that have emerged about El Salvador’s plan, launched in June.
REMITTANCES
Last year Salvadorans sent home nearly $ 6 billion from abroad, mostly from the United States. The sum is equivalent to about 23% of the country’s Gross Domestic Product.
Bukele said last month that bitcoin would bring “huge benefits” because it would allow Salvadorans to save the $ 400 million that he says is spent each year on remittance fees.
But many of the same people who send or receive dollars to El Salvador are wary of bitcoin. Meanwhile, data from the World Bank (WB) show that the costs of remittances from the dollarized Central American country are already among the lowest in the world.
CARBON FOOTPRINT
El Salvador’s bitcoin plan has put the environmental impact of cryptocurrencies under the microscope and the World Bank has pointed to these possible adverse effects among its concerns.
Mining digital currency from cyberspace requires large amounts of energy, and global CO2 emissions from the bitcoin industry have risen to 60 million tons, equivalent to the exhaust gases of some nine million cars, according to a March report by Bank. of America.
Bukele tried to counter concerns about sustainability by saying in June that he had instructed state geothermal power company LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country’s volcanoes.
NORMATIVE COMPLIANCE
While advocates portray bitcoin as an innovation that is independent of government whim, it has sparked warnings that it could increase regulatory, financial, and operational risks for financial institutions, including international standards against money laundering and financing of money. terrorism.
In June, the rating agency Fitch Ratings noted that “capital gains will not be taxed and taxes can be paid in bitcoins, which could attract foreign inflows of bitcoins to the country. This can increase the risks that the proceeds of illicit activities pass through the Salvadoran financial system ”.
The International Monetary Fund has cited legal concerns over bitcoin adoption amid talks with El Salvador about a nearly $ 1 billion financing deal, which is still pending.
After Bukele’s bitcoin law was passed, Moody’s brokerage downgraded El Salvador’s credit quality. The country’s dollar-denominated bonds have also come under pressure.
FOREIGN EXCHANGE
Bukele has created a 150 million dollar trust to allow the conversion of bitcoins into dollars, but doubts remain about how the country will avoid the risks linked to the strong fluctuations of the digital currency, whose value can vary by hundreds of dollars in a day.
Fitch argued that bitcoin would be negative for Salvadoran insurance companies exposed to the currency due to higher currency risk and earnings volatility.
“Insurers that hold bitcoin on their balance sheets for long periods will be highly exposed to price volatility, which will increase asset risk,” Fitch said last month.
Still, for those who own bitcoin, it has proven to be a popular means of payment in El Zonte, a coastal city that was one of the stepping stones for cryptocurrency in El Salvador.
Provided there are no drawbacks with convertibility, that has fueled hope that it could be a major source of foreign exchange.
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