Investing.com - El Salvador will today be the first country in the world to recognize Bitcoin as legal tender. According to President Nayib Bukele, this decision will allow Salvadorans living abroad to save millions of dollars in commissions on the money they send to their relatives.
Despite the popularity of the president, this initiative has been met with some doubts by many Salvadorans, who are worried about the volatility of the cryptocurrency and the operation of this project. For this, we return to the main advantages and disadvantages of the Salvadoran plan.
Fund transfer fees
The project could influence the sending of currencies to the country given the large sums transferred. Last year, Salvadorans sent relatives back home nearly $6 billion from abroad, mostly from the United States. This amount is equivalent to some 23% of the country's gross domestic product.
The President of El Salvador said last month that bitcoin would offer "huge benefits" as it would allow Salvadorans to waive transfer fees that are estimated at $400 million every year.
However, many of the people who send or receive these funds in El Salvador are wary of dogecoin, especially because of its volatility. Also, data from the World Bank shows that the Central American country's dollar remittance fees are already among the lowest in the world and the savings could be weaker than expected.
As with all crypto projects, environmental concerns remain very present. Moreover, the bitcoin project in El Salvador has drawn attention to this point. The World Bank had also signaled its concerns about the potential negative effects in this area.
It is well known that cryptocurrency mining requires large amounts of energy equivalent to the consumption of entire nations. This energy consumption generates large greenhouse gas emissions. Indeed, global CO2 emissions from the bitcoin industry have reached 60 million tons. That's equivalent to the exhaust volumes of about 9 million cars, according to Bank of America (NYSE: BAC ).
The Salvadoran president obviously sought to address sustainability and environmental concerns. In this sense, he said in June that he had asked the public geothermal electricity company to develop an ecological plan for bitcoin. This plan would propose bitcoin mining facilities using renewable energy from the country's volcanoes.
While bitcoin advocates tout it as an innovation independent of government whims, it has sparked fears from regulators. They believe that cryptocurrencies could increase regulatory, financial and operational risks for financial institutions. In particular, it could help circumvent international rules against money laundering and the financing of terrorism.
In June, rating agency Fitch Ratings noted that "capital gains will not be taxed and taxes may be paid in bitcoins, which could attract foreign bitcoin flows into the country. This may increase risks proceeds of illicit activities pass through the Salvadoran financial system."
For its part, the International Monetary Fund has reported on its legal concerns regarding the adoption of bitcoin. This has influenced talks with El Salvador over a nearly $1 billion funding deal, which remains unresolved.
More directly and after Bukele's bitcoin law was approved, rating agency Moody's downgraded El Salvador's creditworthiness. This has resulted in putting the country's dollar-denominated bonds under pressure.
In addition, the Salvadoran president has created a fund of 150 million dollars to ensure the possibility of converting bitcoins into dollars. However, doubts persist on how the country will avoid the risks associated with the volatility of the cryptocurrency, the value of which can fluctuate by several hundred dollars in a day.
In this sense, the Fitch agency explained that bitcoin would have a negative effect on the rating of Salvadoran insurance companies exposed to this currency due to higher exchange rate risk and higher earnings volatility. “Insurers that hold bitcoins on their balance sheets for long periods of time will be highly exposed to their price volatility, which will increase asset risk.”