Bitcoin drops 16% as El Salvador becomes first country to adopt crypto as legal tender

El Salvador, a Central American nation, has become the first country in the world to adopt Bitcoin as the official legal tender, three months after it passed the Bitcoin Law in the legislature.

The price of Bitcoin sharply dropped about 16% on Tuesday morning. At the press time, it was down by about 9.5% and was changing hands at $46,750.

“We must break the paradigms of the past,” President Nayib Bukele tweeted and said the process will come with a “learning curve.”

“El Salvador has the right to move toward the first world.”

In another tweet on late Monday, Bukele announced that the government has bought an additional 200 Bitcoins ahead of formal adoption, holding 400 coins in total, with a current value of about $21 million, based on Tuesday’s trading price.

The country developed Chivo, a digital wallet for individuals and businesses to transact, which will support the automatic liquidation of bitcoin transactions into dollars and withdrawals at bitcoin ATMs around the country.

Mexico-based crypto exchange Bitso will provide the core services and said it is working with California-based Silvergate Bank to facilitate the dollar transactions.

The digital currency will coincide with the U.S. dollar, which the country adopted in 2001.

El Salvador’s legislature passed the Bitcoin law on June 9 by a supermajority, with 62 members voting in favor of the bill, while 19 opposed and three abstained.

The law states “every economic agent” must accept the use of Bitcoin as a legal form of payment, with goods, services, and even taxes can now be paid using the world’s largest cryptocurrency by market cap.

However, the stakes are high for a country that has a debt of 6.5 million. Economists say the speculative nature of the digital currency, which leads to sharp fluctuations, can risk denting the tax revenue and foreign currency reserves of a government.

“The government is betting more than $200 million in a virtual casino, and that’s taxpayer money,” Ricardo Castañeda, senior economist at the Central American Institute for Fiscal Studies, told WSJ.

The government has also shrugged off warnings from creditors such as the International Monetary Fund (IMF), which in June said the move to adopt Bitcoin as a legal tender will raise several macroeconomic, financial, and legal issues as the privately issued tokens will bypass authorities and open doors to illicit transactions.

Similarly, JPMorgan has also suggested El Salvador’s economy could face headwinds and earlier told Bloomberg that a potential “limitation” on the use case as a medium of exchange may emerge.

However, officials from the Bukele administration say the adoption of Bitcoin will lead to affordable financial services where an estimated 70% of the workforce operates in a vast underground, cash-based economy.

On Tuesday, presidential legal advisor Javier Argueta in an interview confirmed that it is mandatory to have an electronic wallet to receive payments in bitcoin, even though the payment may not be received in that cryptocurrency but in dollars.

Picture Credit: Quartz