Tip Sheets

Bitcoin ‘too volatile’ for national currency in El Salvador

Media Contact

Lindsey Knewstub

El Salvador has become the first country to make bitcoin ‘legal tender,’ alongside the U.S. dollar and the new development comes with concerns about integration into the country's financial system and access for the population without internet or computer access.

Robert Hockett

Professor of Law

“El Salvador's 'legal tenderization' of Bitcoin is, perhaps paradoxically, both a distraction and a harbinger. It's a distraction because Bitcoin is far too volatile to serve as a national currency, and appears to have been adopted by the nation's president — notwithstanding the move's unpopularity — simply to draw attention away from constitutional challenges he is facing.

“The move is a harbinger in that central banks worldwide are now planning to digitize and cryptographically protect their national currencies — a movement that will soon render Bitcoin and other privately issued cryptocurrencies as obsolete as the old private 'bank note' currencies of the early paper money era 150 years ago.”

Will Cong

Associate Professor of Finance

“In more developed economies where payment systems are functioning well, digital currency or digital payment is for marginally improving the speed and efficiency. But in regions where a functional payment system or credit reference system is lacking, leapfrogging with a digital payment system or digital currency is an attractive and effective option.

“In El Salvador's case, the country needs a stable currency system and efficient payment system. To the extent that El Salvador's government or bank would not create a central bank digital currency, it makes more sense for them to adopt another major stable digital currency, whether it is centrally offered or decentralized.

“The choice of bitcoin is unlikely to work out very well as bitcoin has limited processing capacity and is not optimally designed. The upside is that no single country has strong controlling power. But given that the country already uses USD as a legal tender, it may as well just adopt a digital dollar offered by Tether or Diem, or simply adopt the DCEP digital RMB, as a way of diversifying foreign influence. Bitcoin does not offer any advantage in carrying out monetary policy either.

“The step El Salvador is taking will likely prepare the population for an adoption of a digital payment system in the medium or long run, but it is unclear to me if bitcoin is the one that is going to work out. Nevertheless, tapping into what the digital technologies have to offer is an encouraging step.”

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