Bitcoin as legal tender

It looks like this is about to happen:

My first reaction was “this is a terrible, nonsensical idea that will only help legitimize the bad idea that is cryptocurrency”; that was not tempered by reading the article.

(Is “financial inclusion” something to be worried about?)

Anyway, since this will prolly happen, at least in El Salvador, here’s a thread to note what is actually happening with regard to bitcoin being legal tender & to consider and debate the topic in general.

What say you, Dopers? Is this a good idea who’s time has come? A bad idea that should be shown the door? Or something else?

People like mobile apps and smart cards that offer instant, zero-fee payments. All of which could theoretically be hacked onto bitcoin, but is not really compatible with its nature and the way it is used.

Does the Salvadorian government (or certain individuals) have a huge cache of bitcoins? Or think this will enable surveillance and tracking compared to hawala operators? Why would they care at all about bitcoin?

ETA you don’t really need a bank account in the following scenario: you go to a mini-mart or kiosk and hand over some cash in exchange for loading up your account in my trustworthy app (which COULD theoretically use bitcoin in the back end but why would I want to? Let’s assume it’s in the local currency.) Then you can pay for stuff by scanning QR codes, etc. You never need a bank account, just to download my app. The bodega guy has a POS terminal (for instance) integrated with my cloud, so he does not have to spend 5 minutes clicking through some web pages.

On an international level I, as the financial operator, would need to maintain bank accounts in multiple currencies but the end user would not have to.

It sounds like the theory is that transferring money with bitcoin is easier. In the other thread on Bitcoin it was mentioned that anyone could create a wallet anywhere they had access to the internet. So thus could be a lossless transfer from the person earning the money in the US back home which is much better than Western Union. Now the proposal is basically you already have bit coin were not going to make you take a loss to transfer it to local currency.

It doesn’t seem crazy on its face but the huge swings in valuation seem like it would make it difficult to use for a day to day currency.

Seems like “huge swings in valuation” (potentially controllable by foreign states, Chinese hackers, etc. more than you) is an issue the national bank might be worried about. Plus, being able to create a wallet anywhere and easily transfer money is not a property that requires bitcoin; see my sketch of a hypothetical app above.

Especially in El Salvador, my app could use US dollars and no conversion fees would be incurred on my end, not that this would be a big problem in general.

It’s cute that the El Salvador president said “a big chunk of those money transfers were currently lost to intermediaries”, because Bitcoin is notorious for its expensive and volatile transaction fees, currently around ~$5.5/transaction and having reached >$60/transaction during the bubble in April 2021, not to mention that the inherent limitations in its protocol that restricts it to a maximum of ~7 transactions/second, whereas VISA’s payment network can handle 2,000 transactions/second.

The third strike is that Bitcoin, having a hard cap of 21 million that can be created, makes it a deflationary asset that people would rather hoard than spend, as is intended with normal currencies.

Now, if that president had instead proposed using one of the countless other cryptocurrencies, one that seeks to address the aforementioned limitations in Bitcoin, then maayybbeee it could work. But Bitcoin itself? No, just no.

IMHO it’s a bad idea. El Salvador uses the US dollar as the official currency. The previous national currency, the colon, stopped being used in 2001. I assume the reason they haven’t introduced another national currency is because their economy is in extremely bad condition, and that any new currency would start to suffer from hyperinflation immediately. I assume that by making bitcoin legal tender, the idea is that all merchants would have to accept bitcoin as payment. Given the volatility in bitcoin, that seems like a recipe for disaster. My guess is that some wealthy Salvadoreños have lots of bitcoin stashed away and are eager to start spending it without having to convert it to US dollars.

ETA: My guess is that the result would end up being a transfer of wealth from what small middle class El Salvador has to the wealthy, by essentially forcing them to trade their dollars in exchange for bitcoin.

Nobody WANTS to use Bitcoin as money. It is used almost exclusively as a speculative investment. It’s lost 30% of its value in three weeks; what lunatic would want to accept something like that as money? If you think it’s going to jump back up, then you’d be insane to spend it.

That’s why I think it’s a scheme for the middle class Salvadoreños to be forcibly parted from their dollars in exchange for bitcoins, transferring wealth from their middle class to their wealthy.

Eh…not so sure.

In countries with hyperinflation, such as Venezuela is experiencing now, the people would rather use any currency other than the bolivar.

I am NOT saying that Bitcoin is the answer here. I am saying that when your currency is worth so little that you consider using it for wallpaper then Bitcoin might be attractive.

Of course, Bitcoin is also very volatile but still better than the bolivar.

Bitcoin’s original premise was a currency free from government meddling. But of course, governments are now meddling with cryptocurrencies. No surprise there.

If your choice was using the bolivar or bitcoin what would you choose?

(Remember the Zimbabwe hundred-trillion dollar note?)

In the case of El Salvador, they don’t have a national currency. To be more precise, the colon was used until 2001, when it was retired and people started using US dollars. For whatever reason, their leadership no longer wants to have US dollars be the national currency. Maybe, as I speculated, the powerful want more money and this is a scheme to force ordinary people to exchange their dollars for bitcoins. Maybe the national treasury is running low on dollars and they want to pay their debts in bitcoins instead. Who knows for sure.

Besides US dollars, bitcoins and so forth there is the solution of having a national bank and currency, but for that to succeed you need to know what the f you are doing (and probably also how to manage a national economy), people need to believe you know what the eff you are doing, and be free of corrupting influences from the powerful, or else you end up like Venezuela and Zimbabwe.

Well, they went and did it:
https://apnews.com/article/caribbean-el-salvador-bitcoin-lifestyle-technology-d30c52b39e16ef49e4b6342fdc885c92
(bolding mine)

So there was this oddball one year mini-real world example funded by an anonymous donor and now we have an inexplicable large-scale real world example to watch happen for ourselves.

I do not envy the people of El Salvador for this.

So, I assume all El Salvador residents have smart phones, computers, and internet access? Even the kids?

Can you expand on that a bit? Where are they going to keep their bitcoin wallets? In their internet-connected PCs or on their smart phones? According to this, only 37% of El Salvadoran mobile phone users have smartphones. ETA: That was 2017 – maybe it has jumped to 100% in the meantime.

Given that up until recently the cost of bit coin was rising faster than inflation, meaning that bitcoin was a deflationary currency, I suspect that most people are just going to keep using dollars, unless Bukele passes laws restricting their use. Why spend your bit coins which are going to increase in value when you can spend dollars instead?

What problem was Bitcoin created to solve?

Officially, to facilitate non-reversible electronic payments between two people without having to rely on a trusted third party (a network of nodes is used instead).

Is that really a “problem”? Electronic payment is very easy in today’s world without Bitcoin.

You can read for yourself what he wrote: https://bitcoin.org/bitcoin.pdf

Basically to be able to make “small casual transactions” without using a bank or corporate payments network, incurring large transaction costs, or having to provide personal information to merchants in order to prove you have the funds and are not using a stolen credit card or will otherwise get the payment reversed. Being a digital substitute for cash payments is explicitly mentioned.

Weaknesses of the design were clear from the beginning, and arguably Bitcoin has failed to meet some or all of these goals, but that does not mean they are impossible to achieve. The central banks themselves are interested in this problem,

including digital bearer instruments, though of course they have their own particular requirements, like potentially blocking use by non-Euro residents or restricting cross-border payments, that, if you do not like, you would have to operate your own, independent network.

To this day, we are hearing about people even in supposedly industrialized countries like the U.S. who are unable to make instant, zero-fee electronic transfers from their bank current account to another, especially across international borders. I recall there was a poster who said his or her bank wanted $35 or so for a wire transfer, which is insane even if they literally had to telegraph the order.