Crypto, what’s the craze?
In 2021, El Salvador adopted the digital currency (cryptocurrency) Bitcoin as official legal tender. This was soon followed by the Central African Republic doing the same. Coming with this was messaging of a new modern economic outlook paired with, ‘rethinking our economic philosophy’, it promised a lot, so did it deliver?
What is cryptocurrency?
Reading that you may have no idea what this entails so we need to first establish the concepts behind cryptocurrency and arguments for it. The basic tenets of Cryptocurrencies being that it would be currency free from regulation and government control and this would provide you greater security and anonymity as well as freedom as its not using a bank. You have an asset that has the value of currency and can be used in peer-to-peer transactions. It has value that could massively increase in theory with increasing supply and demand.
Some considerations of Bitcoin’s usage has been its utilisation to provide financial support for Ukraine totalling £10.2 Million in the first 2 days of the invasion. There is arguments for its merit in providing such support with given anonymity and freedom from bank interference or global sanctions. As well as giving an alternate form of payment which have less risk attached.
All this potential for success led to increasing media coverage and political engagement with cryptocurrency and now being part of media and tech coverage, often propelled by major figures discussing Bitcoin. For example, Elon Musk’s talking about Bitcoin led to an increase in price and a significant reduction in prices when mentioning Tesla possibly selling its Bitcoin purchases.
Cryptocurrency in El Salvador
However shifting to its adoptees in El Salvador, the Nuevas Ideas (new ideas) party formed by incumbent president Nayib Bukele gained a supermajority in the 2021 Salvadoran elections. This popular mandate for the populist policies led to the introduction of bitcoin as legal tender with it coming into effect in September 2021. Yet there was notable opposition from economists and the IMF due to fears around instability and it being unreliable, I.e. Tatiana Marroquin is was a local economist. However, this hasn’t entirely materialised despite those fears being true as we’ll look at later.
Therefore, the desire for major improvements from Cryptocurrency in El Salvador or avoid these pitfalls of typical currency aren’t accurate and haven’t come to much fruition but neither have its worst fears, so in some sense it’s too early to make definite judgements, but there is still splits in its adoption. There have been subsequent attempts to integrate various cryptocurrencies values as stable with conversion rates to the dollar (stablecoins such as Tether.). This being achieved through greater oversight and auditing as well as reserves of the currency as to give it credence. This again sounds good but also doesn’t work as the most prominent company involved, ‘Terra’ had its tying to the dollar severed and promptly lost 45 billion USD in Market Capitalization, so these hopes have fallen flat to some degree as flagship companies supporting It fell flat on its face.
The future of Bitcoin: Has it worked?
Also, this compromises significantly on the ideals of Bitcoin, that you want a decentralised currency that will be free from banks but the best way for the currencies to function might just be the use of banks. Theoretically this doesn’t preclude cryptocurrencies from success – there are lots of high values in play and with spikes in value this does allow for profit. However, there is cognitive dissonances in how it wants to function as a currency and how it does within a system which has led to compromising on some of its key planks and its access massively favours those with the capacity to do large scale mining.
This has been rather unsuccessful in delivering these visions of major improvements or changes. The few successes are outweighed by the risk associated with adopting it due to its instability and there hasn’t been sufficient regulation since to make it a viable alternative. The attempts to make crypto work with regulation shall be considered in my next piece as we move towards considering the restrictions put on cryptocurrencies. Looking outside of the nations that adopted them and the changing approach to cryptocurrencies in light of 'fraud and conspiracy’ in the Multi-billion figures with the collapse of FTX and the arrest of its founder Sam Bankman-Fried.
