El Salvador just passed legislation making Bitcoin, the world’s most popular cryptocurrency among more than a thousand, a legal tender as of September. The response was swift, however there was little consensus on the significance of the decision. There was also no discussion of the critical underlying concerns of whether a mix of cryptocurrencies would eventually threaten the US dollar as the world’s leading reserve and trading currency, or whether non-government digital currencies will eventually challenge government currencies.
The stakes are at an all-time high, and the array of characters is incredible. The dollar has been the backbone of international trade since the 1940s. To engage in commerce, all countries and central banks must hold dollars, and the United States has had unique restrictions over international trade, including the capacity to impose severe sanctions on opponents and enemies. Furthermore, because the US government controls the supply of dollars, it has the unique capacity to print dollars to finance trade and other deficits. Anything that puts this arrangement in jeopardy jeopardizes essential aspects of America’s stature.
Let’s talk about cryptocurrencies.
Unlike the Chinese Renminbi (RMB) or the European Union’s Euro, cryptocurrencies began as private-sector inventions to speed up and reduce the cost of payments by eliminating currency exchanges, banks, processing fees, credit card firms, and other intermediaries. As a reason, many governments classify them as “financial assets,” rather than currencies. Yet, because cryptocurrencies frequently entail huge asset transactions over the internet, they necessitate exceedingly secure, internet-centric systems, the most prominent of which is known as blockchain. As a result, blockchain-based, internet-centric, private cryptocurrencies have emerged as investment vehicles as well as de facto currencies.
Governments are introduced.
Private sector cryptocurrencies pose a challenge to the very role of governments for many governments, most notably China, and are worse, a menace controlled by enterprises, the majority of which are American. Businesses and individuals, according to this viewpoint, have no part in the creation of money. Free-standing cryptocurrencies are also a fraud for these and many other governments when used as an investment. Because most private-sector cryptocurrencies are not backed by any government currency, they are, in this opinion, just play money worth whatever a shady seller or deceived buyer can charge and pay. Freestanding cryptocurrencies, such as Bitcoin, have taken off and are now used as a means of payment by a increasing number of businesses as well as an investment by investors all over the world.
Then there’s huge tech.
To compensate for the fact that many cryptocurrencies are not backed by governments or dollars, certain digital companies, like Facebook, Uber, Spotify, and others, have experimented with cryptocurrencies that are legally and expressly backed by currencies/dollars, ensuring that real money can be redeemed for the cryptocurrency: these are known as “stablecoins.”
Venezuela and Russia are now involved.
In 2018, the Venezuelan government established the Petro, which it billed as a government stablecoin backed by Venezuelan petroleum, and it accepted the Petro as money within Venezuela, in order to avoid American economic sanctions (with reportedly Russian backing). Venezuela’s experiment has been controversial, in part because the Petro represents an attempt to circumvent US sanctions, but not only. And very likely not a success, given that no country (with the exception of Russia and Iran) or big corporation has yet to recognise Petros as a currency. This is likely due to the scale and diversification of the Venezuelan economy as well as the United States’ aggressive opposition.
Let’s go to China.
In China, daily payments are not made with cash, credit cards, or banks. They are principally based on WeChat Pay and Ali Pay, two Chinese RMB-centric electronic payment systems with 800 million and 520 million users, respectively. These low-cost, encrypted digital payment systems allow over a billion Chinese to send money or make transactions in RMB using their smartphones. The Chinese government has declared plans to issue a wholly digital RMB (d-RMB) as a result of the success of these digital wallets. The d-RMB is an online form of RMB cash (with virtually no costs) that has been tested within China. It is conceivable that China will push it as a new global currency. The d-RMB will very probably challenge the dollar as a global payment currency, with d-RMB holders free to transfer their currency into other currencies or spend it in China or elsewhere.
Let’s go to El Salvador.
El Salvador is the smallest country in Central America, with a per capita GDP of roughly $4,000, yet it is the most densely populated. Following the end of its civil war in 1992 (when at least one million people fled to the United States), the country’s governments have pursued various development initiatives. They included tourism, textiles, and the adoption of the US dollar as the country’s official currency. Nothing, however, has been more significant than the estimated $4 billion in annual payments made by 1-2 million El Salvadorans in the United States to 360,000 El Salvadoran homes. The 37-year-old mayor of San Salvador, Nayib Bukele, was elected president in 2019 by the “New Ideas Party,” which also won a majority in Congress. Although being accused of authoritarian tendencies, his strategy has focused in part on using technology to alleviate poverty. Bukele proposed and Congress approved creating Bitcoin their second currency in June, claiming that it would lower fees for expats sending money home, free the country from American monetary control, and encourage technology investments. The first two are undeniably true, but the degree to which they apply is a matter of debate; the hazards, on the other hand, are entirely distinct. Nonetheless, El Salvador has now designated Bitcoin as an legally recognized currency. Whether this is a watershed moment in global cryptocurrency acceptability or just another little blip on the radar in a much greater economic, geopolitical, and technological conflict will likely depend on whether other countries follow El Salvador’s lead and, more crucially, what happens when governments led by China promote their own national digital currencies.
In either case, the United States must pay heed.