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Ernest Hemingway said change happens "gradually, then suddenly". Bitcoin advocates have adopted Hemingway's adage to explain how acceptance of the cryptocurrency will gradually accumulate until suddenly the world becomes a very different place. This prospect is beginning to unsettle global financial institutions, with Agustín Carstens, head of the Bank for International Settlements, notifying German media outlet Der Spiegel that “bitcoin is only good for two things, speculation and ransom payments'' and Andrew Bailey, governor of the Bank of England, threatening a slew of “tough love” regulations.
You will know a bitcoin advocate by the laser eyes motif on their Twitter profile. In early June president of El Salvador Nayib Bukele placed laser beams over his eyes on his Twitter picture. Then, on 9 June the Salvadoran Congress ratified a bill to make bitcoin legal tender, "gradually, then suddenly" the cryptocurrency is changing the world's economic landscape.
The bill makes bitcoin a foreign currency in other countries, and could potentially exempt investors from capital gains tax. El Salvador’s move is being hailed as a significant development in the cryptocurrency’s 12-year history. However, the Salvadoran decision elicited a cool response from Gerry Rice, spokesperson for the International Monetary Fund, who warned that "adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis".
But the contagion is out, and bitcoin pioneer Max Keiser claims El Salvador has set a precedent that “challenges global banking institutions”, who cannot abide a technology that “separates money from state”, and the disruption this would have on global allegiances.
Speaking to Yahoo Finance, Keiser suggested the motive behind president Bukele’s legislation was because, "El Slavador, like all its neighbours in the region, has been searching for a way to establish economic self-sovereignty for many decades".
Keiser maintains that "because bitcoin is un-confiscatable and uncensorable, in a way that preserves sovereignty, other countries will follow in El Salvador's footsteps and join the bitcoin revolution". He predicts the next nation to catch the contagion will be Guatemala, home to 37 volcanoes that could harness geothermal energy to power bitcoin mining stations. Guatemala will look with interest at El Salvador’s recent drilling of heat-pump boreholes into its volcanoes, which president Bukele tweeted could “offer facilities for bitcoin mining with very cheap… zero-emissions energy”.
However, the World Bank is not convinced and has refused a request from El Salvador to assist with implementing bitcoin infrastructure, “given the environmental and transparency shortcomings”. According to Professor Thorsten Beck of the University of London, in refusing its support “the World Bank is hoping to deter others from doing the same”. Further to this, a JPMorgan client note from 11 June stated that El Salvador’s ambitions, “may imperil negotiations with the IMF”.
The next domino to fall could be Panama, with congressman Gabriel Silva hoping to have a bitcoin legal tender bill in the Panamanian National Assembly “within a month”. Silva claims the bill will be facilitated by the nation’s constitution that “prohibits mandating only certain currencies as legal tender, which could facilitate the incorporation of bitcoin as a currency”. Also, on 7 June, national deputy of Paraguay Carlitos Rejala urged his government to embrace bitcoin.
Watch: What is bitcoin?
The contagion is not limited to the Americas, speaking to Yahoo Finance, George Tung from cryptocurrency news platform Cryptosrus suggested that "Tanzania and Nigeria both seem to be following in the same path" because of a need to "improve their financial situation and break free of the threat of currency substitution". These African nations, who in the words of the IMF have “similarly situated” economies to that of El Salvador might circumnavigate the risk of dollarisation and embrace “the bitcoin standard”.
President Samia Suluhu Hassan of Tanzania has called on the nation's central bank to "start working on the development” of financial infrastructure to make bitcoin legal tender. She has tasked the nation's central bank “to be ready for the changes and not be caught unprepared”. Further to this, writing in Bitcoin Magazine, Human Rights Foundation chief strategy officer Alex Gladstein said Ethiopia could become “the Norway of the future” and harness its wind and solar resources to power bitcoin mining.
But why would El Salvador and similarly positioned nations risk to imperil their relationship with world financial institutions? Keiser argues that "countries like El Salvador are now realising they can challenge the IMF and use bitcoin to achieve monetary sovereignty". Gladstein suggested bitcoin as an alternative to “struggling governments” having to adopt “the petrodollar as legal tender, and becoming a de facto US client state”.
El Salvador’s “bitcoin revolution” relies on every consumer having an internet-ready mobile phone to run transactions. However, data from Statistas found that only 33.5% of El Salvador’s population had access to the internet. There are also questions about what would happen to El Salvador’s experiment if bitcoin entered a bear market. Speaking to Yahoo Finance Stephen Kelso, head of markets at ITI Capital, said: “Bitcoin’s volatility presents a challenge to merchants and traders as a form of currency for payments.” He added that this volatility could deter “governments which utilise such a volatile asset as a primary form of purchasing goods”.
With economic woes forecast due to the coronavirus pandemic, governments are considering inflation as the only way to reduce the value of their debts over time. Bitcoin, with its finite supply of 21 million coins, could provide consistent value for consumers.