Canada and El Salvador are very different countries that have something in common: the two politicians are convinced that cryptocurrencies, especially bitcoin, are a way to free people from the constraints of the financial system.
Posted at 11:00.
The candidate for the premiership of Canada, Pierre Poilivre, is very outraged by the Bank of Canada and monetary policy in general. He promises, if he leads the country, to expand the use of bitcoin and other cryptocurrencies in all transactions to protect Canadians from inflation created, he says, by massive purchases of federal government bonds by the central bank to support the economy during the pandemic.
If this happens, it will be the first time that a country has put its central bank in competition with another official financial system. Despite their popularity, cryptocurrencies are under scrutiny from a growing number of governments who want to regulate their use. Countries like China have banned them completely, while others have created their own digital currency with blockchain technology.
El Salvador is so far the only country that has made bitcoin its national currency. Its president, Nayib Bukele, is betting big on the future of bitcoin.
He wants to create a city from the ground up to place bitcoin miners in a community where there would be no taxes or taxes. The Salvadoran government wants to issue $1 billion in Bitcoin bonds to build its Bitcoin City, a fully serviced city next to a volcano that will supply it with geothermal energy, because bitcoin mining requires so much energy.
In 2021, El Salvador is ditching its national currency, the colón, in favor of the US dollar. It no longer controls any instrument of monetary policy. By adopting bitcoin as the national currency, the government’s argument to convince the population was primarily economic. Bitcoin allows expatriates to transfer money to their families back home for free, which is a very important source of income for Salvadorans.
Another young experience
The Salvadoran experience is still too young, just over a year old, to draw conclusions. But bitcoin transactions are still negligible in this country of 6.5 million people who are poor and heavily in debt, according to local media. That doesn’t stop the president from continuing his ambitious bid to make his country the Bitcoin capital of the world. But he risks facing a harsh reality.
Let’s start with the International Monetary Fund (IMF). El Salvador receives international assistance and needs the support of the IMF in order to continue its activities and fulfill its obligations. However, the IMF has explicitly asked the El Salvadoran government to cancel and revoke the national currency status granted to bitcoin.
The benefits of bitcoin to the public, i.e. access to a free exchange system, pale in comparison to the risks associated with cryptocurrencies, the IMF explains in a recent report on El Salvador.
Bitcoin and other cryptocurrencies are a parallel channel that allows all types of transactions to be carried out in complete anonymity. They can be used to finance all kinds of activities, including tax evasion and terrorism, the IMF notes.
But for the people of El Salvador, the biggest risk is bitcoin volatility, which can make someone rich and bankrupt in a very short amount of time. The IMF warns that in the event of a rapid fall in the value of bitcoin, the government will have to take on more debt to ensure that bitcoin is convertible to US dollars.
In general, El Salvador may have the opportunity to get rich on bitcoin, but it might as well go bankrupt.
Over the past year, Bitcoin has fallen from a high of $68,789 to a low of $28,893 and was worth around $46,200 on Friday. For protection against inflation, this, of course, is not ideal. It is also not the way to regain control of the currency, as the Conservative Party of Canada challenger put it, as bitcoin fluctuates more than all currencies, and most often for various obscure reasons.
Mr. Poilevre says he wants to make Canada “the freest country on Earth” with cryptocurrencies. In El Salvador, Mr Bukule wants to create his own bitcoin paradise. Canada and El Salvador, same fight? We will all see this.
To learn more
- 9 countries
- This is the number of central banks that have created their own digital currency with blockchain technology. Pilot projects are underway in 14 countries and several others, including Canada, are exploring this possibility.
source: ATLANTIC COUNCIL