In World First, Bitcoin Becomes Legal Tender in El Salvador

El Salvador on Tuesday becomes the first country in the world to accept bitcoin as legal tender, despite widespread domestic skepticism and international warnings of risks for consumers.

President Nayib Bukele's government claims the move will give many Salvadorans access to bank services for the first time and save some $400 million in fees on remittances sent home from abroad every year, reported Agence France-Presse.

"Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador. #Bitcoin did this," Bukele said on Twitter Monday.

He started the ball rolling Monday evening by announcing El Salvador had bought its first 400 bitcoins, in two tranches of 200, and promised more were coming.

The 400 bitcoins were trading at around $21 million, according to the cryptocurrency exchange app Gemini.

Recent opinion polls showed a majority of El Salvador's 6.5 million people reject the idea and will continue using the US dollar, the country's legal currency for the last 20 years.

"This bitcoin is a currency that does not exist, a currency that will not benefit the poor but the rich," said skeptic Jose Santos Melara, who took part in a protest by several hundred people in the capital San Salvador last week.

"How will a poor person invest (in bitcoin) if they barely have enough to eat?"

In June, El Salvador's parliament approved a law to allow the crypto money to be accepted as tender for all goods and services in the small Central American nation, along with the US dollar.

The bill, an initiative of Bukele, was approved within 24 hours of being presented to Congress -- where the president's allies have held a majority since March.

Experts and regulators have highlighted concerns about the cryptocurrency's notorious volatility and the lack of any protections for its users.

- Skepticism -
The government is installing more than 200 bitcoin teller machines, some guarded by soldiers to prevent possible arson by opponents.

And Bukele has promised $30 for each citizen who adopts the currency.

"These are decisions the administration and lawmakers have taken without consulting" the population, said Laura Andrade, director of the Public Opinion Institute of the Central American University, which found in a poll that 70 percent of Salvadorans opposed the move.

"We see that people do not perceive a positive impact to significantly transform their living conditions," she told AFP.

Nearly two-thirds of Salvadorans questioned for the poll said they had no interest in downloading the "Chivo" electronic wallet that will allow users to buy and spend bitcoin.

Oscar Cabrera, an economist at the University of El Salvador, said the currency's high volatility will have a "negative impact" on consumers, affecting the price of goods and services.

The currency fell beneath $30,000 in June, less than half its all-time high of more than $64,000 just two months earlier.

For its part, the Salvadoran Foundation for Economic and Social Development (FUSADE) said it was "unconstitutional" to make it compulsory for merchants to accept bitcoin as a form of payment.

- 'Malign actors' -
Bukele, who is popular but under fire in several quarters for moves to tighten his grip on power, has accused opponents of seeking to "sow fear" among Salvadorans, few of whom have access to formal banking services.

Remittances account for more than a fifth of GDP in the dollarized economy, mainly sent in dollars via agencies such as Western Union by an estimated 1.5 million expats.

According to World Bank data, El Salvador received more than $5.9 billion in 2020 from nationals living abroad, mainly in the United States.

And the country is relying on this money to boost a struggling economy that contracted 7.9 percent in 2020 due in large part to the coronavirus pandemic.

Economists and international bodies such as the World Bank, International Monetary Fund and Inter-American Development Bank have expressed concerns about El Salvador's bitcoin adoption.

The United States has urged El Salvador to ensure a "regulated," "transparent" and "responsible" use of bitcoin, and to protect itself from "malign actors" such as hackers seeking ransom money.

Bitcoin is criticized by regulators for its potential for illegal use -- notably in laundering money from criminal activities and financing terrorism.

But not everyone is against it, and according to Bukele in late June, some 50,000 Salvadorans were using bitcoin.

Many of them are in the coastal town of El Zonte, where hundreds of businesses and individuals use the currency for everything from paying utilities bills to buying a can of soda.

Started as a project by an anonymous bitcoin donor, the town until recently boasted El Salvador's only bitcoin teller machine.

The International Monetary Fund said on Thursday that an escalation of the conflict in the Middle East could have significant economic ramifications for the region and the global economy, but commodity prices remain below the highs of the past year.

IMF spokesperson Julie Kozack told a regular news briefing that the Fund is closely monitoring the situation in southern Lebanon with "grave concern" and offered condolences for the loss of life.

"The potential for further escalation of the conflict heightens risks and uncertainty and could have significant economic ramifications for the region and beyond," Kozack said.

According to Reuters, she said it was too early to predict specific impacts on the global economy, but noted that economies in the region have already suffered greatly, especially in Gaza, where the civilian population "faces dire socioeconomic conditions, a humanitarian crisis and insufficient aid deliveries.

The IMF estimates that Gaza's GDP declined 86% in the first half of 2024, Kozack said, while the West Bank's first-half GDP likely declined 25%, with prospects of a further deterioration.

Israel's GDP contracted by about 20% in the fourth quarter of 2023 after the conflict began, and the country has seen only a partial recovery in the first half of 2024, she added.
The IMF will update its economic projections for all countries and the global economy later in October when the global lender and World Bank hold their fall meetings in Washington.
"In Lebanon, the recent intensification of the conflict is exacerbating the country's already fragile macroeconomic and social situation," Kozack said, referring to Israel's airstrikes on Hezbollah in Lebanon.
"The conflict has inflicted a heavy human toll on the country, and it has damaged physical infrastructure."
The main channels for the conflict to impact the global economy have been through higher commodity prices, including oil and grains, as well as increased shipping costs, as vessels avoid potential missile attacks by Yemen's Houthis on vessels in the Red Sea, Kozack said. But commodity prices are currently lower than their peaks in the past year.
"I just emphasize once again that we're closely monitoring the situation, and this is a situation of great concern and very high uncertainty," she added.
Lebanon in 2022 reached a staff-level agreement with the IMF on a potential loan program, but there has been insufficient progress on required reforms, Kozack said.
"We are prepared to engage with Lebanon on a possible financing program when the situation is appropriate to do so, but it would necessitate that the actions can be taken and decisive policy measures can be taken," Kozack added. "We are currently supporting Lebanon through capacity development assistance and other areas where possible."

In World First, Bitcoin Becomes Legal Tender in El Salvador