While China has banned decentralized cryptocurrencies, other countries are exhibiting a more positive interest, as NewScientist (18 September 2021) reports:
El Salvador has officially adopted bitcoin as legal tender. Draft legislation may soon lead Panama down the same path, while China, the US and the UK are investigating launching their own cryptocurrencies. Here’s what you need to know.
Why are countries adopting bitcoin?
President Nayib Bukele hopes bitcoin will alleviate El Salvador’s prickliest economic problems: citizens sending money home from abroad account for up to a fifth of the country’s GDP, but they have to pay high transaction costs, and 70 per cent of people have no bank account. Bitcoin enables quick, cheap payments across borders, and doesn’t require banks.
Cryptocurrency is a spawn of the digital age, which makes it a challenge to use by those not connected to the Internet:
While many in El Salvador were posting their successful bitcoin purchases on social media, others were marching in the street in protest.
And the markets are spooked. The Financial Times reports that the yield on long-term Salvadoran bonds rose from 8.5 per cent in June prior to the bitcoin announcement to 11 per cent, meaning confidence in the state’s finances has dropped,
And bitcoin’s volatility makes it a dubious choice over the long term, if that volatility continues, as the article notes. But I don’t doubt there will be continued experimentation, as the advantages, imagined or real, can be alluring. Get ready for a new acronym: CBDC –
But we are likely to see central banks around the world launching their own digital currencies, combining benefits of cryptocurrencies and traditional money. Financial consulting firm PwC published a report earlier this year on these so-called Central Bank Digital Currencies (CBDCs). The report claimed that 60 governments are currently working on one, and that 88 per cent are basing them on blockchains, the technology behind bitcoin, though not all CBDCs will be cryptocurrencies.
CBDC obviates two features of bitcoin, which is lack of central bank control and, therefore, algorithmic control of the amount of legal tender. While these features are advertised as positives, they strike me as potential negatives – and, by erasing them, we may see CBDCs succeed.
