Today, the President of El Salvador, Nayib Bukele, released a video through the Bitcoin 2021 Miami Conference, claiming to submit a bill to make Bitcoin the country’s legal tender (Legal Tender). Subsequently, Nayib Bukele also tweeted support for Bitcoin. Information, and added his Twitter avatar with the popular “laser eye” in the currency circle.
This news made major news headlines, but I believe most people’s first question is, “There is still this country? Where is it?”
According to Wikipedia, El Salvador is located in the northern part of Central America with an area of 21,041 square kilometers, which is slightly smaller than my country’s Nanning (22,099 square kilometers). The population of El Salvador is 6,344,700, which is slightly less than that of Nanning (7.254 million). The per capita GDP of El Salvador is 4000 US dollars, less than half of Nanning (8918 US dollars).
El Salvador’s idea of using Bitcoin as a legal currency may be bold, but it is basically impossible to implement it.
1 . Technically natural limit
In recent years, the Bitcoin network has been in a state of congestion, and its ability to process on-chain transactions has reached the upper limit. According to bitinfocharts, in the past 24 hours, the BTC network has processed 181,006 transactions, while the total population of El Salvador is more than 6 million. In other words, even if the current Bitcoin network is only used by one country in El Salvador, it is not enough for Salvadorans to send an average of one transaction per month . For fiat currencies, such a capacity obviously cannot cope with daily needs.
BTC’s expansion plan is the Lightning Network, but it has been developed over the past few years, and so far there are very few users. Moreover, the use of the Lightning Network also needs to send Bitcoin to the Lightning Network in the form of on-chain transactions. Even the recharge demand of a country in El Salvador cannot be met by the current Bitcoin network. There is also the issue of recharge fees. El Salvador ranks 111th in the world in per capita GDP, and 29.2% of the people belong to the poor (disposable income is less than 5.5 US dollars per day). When the Bitcoin network is congested, transaction fees can easily be tens of US dollars. Obviously it cannot be afforded by most Salvadorans.
In April of this year, a user named @rip44614726 on Twitter tweeted a complaint to Phoenix Wallet, the lightning network wallet, saying that he had received a notification that the memory pool of the Bitcoin network was full and the fee was too high to accept transfers temporarily. For fiat currencies, such a network is obviously not stable enough.
2. Economic issues
As far as legal tender is concerned, through national laws and regulations to make it legally circulated currency, no one can refuse, but at the same time, the country also needs to undertake corresponding obligations, that is, to maintain the stability of the currency. When the currency is not stable enough, people tend not to use the currency, even the country’s legal tender.
When the currency is facing huge inflation, people tend to spend the currency that is about to depreciate as soon as possible, and no business is willing to accept it. This scenario happened in Zimbabwe a few years ago or in the Republic of China decades ago. In this case, people tend to abandon the legal currency and use a more stable “currency”, such as the U.S. dollar or rice.
When currency faces huge deflation, people tend to keep the currency for nothing, and currency that has lost its circulation is not considered legal currency. This kind of situation rarely happens in human history. After all, most currencies are inflationary in the long run. But in the history of Bitcoin, this kind of thing happened frequently. The most obvious example is the programmer who spent 10,000 Bitcoins on two pizzas.
The huge obstacle for Bitcoin to become a legal currency lies in its huge volatility. Imagine that a pizza shop in El Salvador is priced in “fiat currency” Bitcoin. Does it need to change the price every day? The company pays employees Bitcoin as salary, can it pay a fixed amount every month regardless of the huge fluctuations in the value of Bitcoin? If the currency cannot be used to price daily goods or services, then the currency obviously cannot become legal tender.
The most likely scenario in El Salvador is that it is priced in a stablecoin such as the U.S. dollar and settled in Bitcoin, just as Tesla did before accepting Bitcoin. However, in this way, the actual legal currency is the US dollar, which is just covered by a layer of Bitcoin.
3. The true intentions of the President of El Salvador
For a politician, what counts is prestige. Whether he can realize his program is another matter. In the political field, trying to promote Bitcoin to become a legal currency is not new. According to a report in the US “Time”, as early as 2016, Iceland’s “pirate party” tried to promote Bitcoin to become the country’s legal currency. In the future, regardless of whether Bitcoin can become the legal currency of El Salvador, El Salvador, a small Central American country and its president, have at least become well-known in the currency circle. From the perspective of exposure, the president’s purpose has been achieved.
As for the news that a certain village in El Salvador should start a Bitcoin economy, the truth is that a donor found a forgotten USB flash drive containing Bitcoin, so he donated hundreds of thousands of dollars to this village every year to build a “Bitcoin Beach” “. The total number of people in the village is only 3,000. In other words, this landing behavior is based entirely on donations, rather than rational considerations. Therefore, this announcement by the president of the country may be to some extent a hope for more donations.