ViaBTC Insight | El Salvador May Issue Its Own Stablecoin. Can Its Crypto Attempts Go Smoothly?
The El Salvador government has plans to launch a native stablecoin, referenced as the Colón-Dollar, reported by the Latin American digital newspaper El Faro. According to the video recording cited, the top negotiators for the initiative are not government officials but two brothers of the country’s president, who claim to be advisers to him and say the final decision is still in his hands.
The initiative is another major plan regarding cryptocurrency adoption following the approval of the Bitcoin Law, though whether it will be implemented remains unknown. According to the dialogue, the country does not plan to replace the US dollar, the existing currency in circulation, with Colón-Dollar, but hopes to gradually legalize all cryptocurrencies and establish its own stablecoin and government cryptocurrency app.
According to reports, El Salvador plans to realize digitization after the establishment of the stablecoin and government cryptocurrency app by gradually digitizing all government records and processes via blockchain technology. For example, a series of public and private documents such as identity certificates, social security cards, tax records, property deeds, birth certificates, vaccination certificates, academic certificates, and criminal records will be digitalized and stored on the blockchain. According to the timetable disclosed in the video, El Salvador hopes to achieve digital transformation in 2022.
Current Situation of El Salvador
El Salvador lies in the northern part of Central America, covering an area of 22,040 square kilometers. According to data in 2019, it has a total population of 6.705 million and a GDP of $26.75 billion, half of which is contributed by foreign trade. El Salvador is one of the “low- and middle-income countries” in the world with a weak industrial foundation as its economy is dominated by agriculture.
Colón is the sovereign currency of El Salvador, but less than 10% of the currency is in circulation in this country. What is more used is the US dollar. In addition, El Salvador is also a cash-intensive country, with more than 70% of the population having no bank account. As a result, it’s difficult for the government to carry out macro-control through monetary policy and economic measures.
Moreover, more than 30% of El Salvador’s population lives and works abroad, and their overseas remittances account for up to 20% of GDP, which has left the Salvadoran economy highly vulnerable to the monetary policy and financial risks of the United States. For example, the 2008 international economic and financial crisis directly led to the slowdown in economic growth in this country. Now, due to the impact of the COVID-19 pandemic and other influences, the Federal Reserve, using even more aggressive monetary policy than it did in 2008, has begun to prime the pump, and El Salvador, which uses the US dollar as its main currency, is expected to suffer a GDP slump.
El Salvador is not the only Central American country that faces the following problems: a weak industrial foundation, a gradual substitution of the US dollar for its sovereign currency, a high vulnerability to US monetary policy, and a fragile economic structure. Therefore, after El Salvador made Bitcoin its legal tender, Paraguay and other Central American countries have shown interest in Bitcoin and blockchain technology as the first step to accept the newest techniques and “de-dollarization”.
Will cryptocurrency save El Salvador?
Although El Salvador has passed the “Bitcoin Law” and announced that Bitcoin had become the country’s legal tender, it still faces many challenges. Even with its adoption of the Lightning Network, the current Bitcoin network can hardly bear the daily transactions in El Salvador, and at the same time, the violent fluctuations in the Bitcoin price will strike the economy of El Salvador. Both of these explain why the government cannot yet abandon the US dollar. In addition, the World Bank, the International Monetary Fund, and a large number of leading investment banks hold little confidence in El Salvador’s move, as they believe the cryptocurrency does not have the capacity of legal tender yet brings along sizable financial and legal risks.
The enactment of the “Bitcoin Law” is not the end of El Salvador’s exploration in cryptocurrencies. Colón-Dollar, the new stablecoin revealed by the government, seems to be the country’s attempt to manage the risks of Bitcoin. In this case, the Bitcoin Law aims to encourage the public to accept and use cryptocurrency to replace the dominant US dollar. And the term Colón-Dollar, the name of El Salvador’s sovereign currency, also includes Colón, suggesting the country’s confidence in its sovereign currency along with the efforts to peg it to the US dollar. El Salvador may adopt measures such as benchmarking its stablecoin against the currency basket to optimize the design and reduce the dollar’s economic impact on itself.
In addition, El Salvador’s adoption of cryptocurrency is also expressing its financial inclusion to the world. According to the national digital transformation plan shown in the video, El Salvador constantly embraces technological and financial innovation, welcoming Bitcoin investors to El Salvador for cryptocurrency and blockchain investment. The promulgation of the El Salvador Bitcoin Law not only brings a legal tender reform but also reveals a signal that, through cryptocurrency and blockchain technology, El Salvador will harvest economic development in various industries including finance, investment, tourism, etc.
The Salvadoran President Nayib Bukele said in an address to the Bitcoin 2021 Conference that he planned to make Bitcoin the country’s legal tender, “In the medium and long term, we hope this small decision can help us push humanity towards at least a tiny bit into the right direction.” Before that, no one could imagine more than sixty years after the Bretton Woods Conference, a currency would try to challenge the hegemony of the US dollar. Perhaps at present, Bitcoin can hardly shake the US dollar’s status as a world currency, and there will be some obstacles in the process of popularization of cryptocurrencies. However, Bitcoin and the cryptocurrency and blockchain technology it represents may become some countries’ solid support on their journey to “de-dollarization” as well as a booster to “push humanity to the right direction.”
