The value of Bitcoin plummeted on Tuesday, after El Salvador’s experiment with the digital currency this week.
El Salvador became the first country in the world to accept Bitcoin as a legal tender on Tuesday, after the digital currency was officially adopted on 7 September 2021.
In June this year, El Salvador approved President Nayib Bukele’s proposal to embrace the cryptocurrency, after just a five hour debate in Parliament.
The move surprised many, and the World Bank (the international lender to developing nations) refused to help implement it as legal tender, due to concerns over transparency and the environmental impact of Bitcoin mining.
In late June rating agency Fitch also warned of greater risks for banks due to the El Salvador law.
It said the move could open floodgates to money laundering, increase banks’ exposure to regulatory risks.
Another setback came last week when a survey revealed that nearly three quarters of the population of El Salvador disagreed with their government’s decision to adopt Bitcoin.
Yet despite this, the government of El Salvador pressed ahead with its plan, and on Tuesday Bitcoin became legal tender in the country.
The government attempted to sweeten the move by purchasing 400 bitcoins (worth about $20 million).
It allowed citizens to download the government’s new digital wallet app, which gives away $30 (£22) in equivalent Bitcoin to every person.
These digital wallets are called Chivo wallets, and are preloaded with $30 worth of bitcoin for Salvadorans who register.
The government also installed 200 Bitcoin ATMs around El Salvador.
But it is fair to say that the adoption of Bitcoin in El Salvador was not exactly plain sailing.
The value of Bitcoin had surged to through $52,000 late Monday, reaching its highest level since May.
But on Tuesday when Bitcoin became legal tender in the country, the worst outcome materialised when Bitcoin’s value plummeted as much as 20 percent on Tuesday.
It fell to under $43,000 at one point – it is currently valued at $46,620 as of 2pm BST Wednesday.
The BBC, citing an opposition politician, said the fall caused one of Latin America’s poorest countries to lose $3m.
Matters were not helped when Apple and Huawei didn’t made the government-backed Chivo digital wallet, was not available on their respective App Stores.
The government servers had to at one point be pulled offline after they couldn’t keep up with user registrations.
“It was a very bad day for President Bukele, his government and his Bitcoin experiment,” opposition politician Johnny Wright Sol told the BBC.
“The majority of the population knows very little about cryptocurrencies. What we do know is it’s a very volatile market. Today that was surely made manifest.”
Wright Sol said Bitcoin was not an apt national currency and was rushed through:
“The Bitcoin law was approved in parliament with hardly any debate. It took only about five hours to go through,” he told the BBC.
“We’re not cryptocurrency or Bitcoin haters, but we don’t believe that it should be compulsory that businesses should be obligated to accept Bitcoin in payment,” he said. “The state is backing these payments and assuming the risk but at the end of the day us taxpayers are all the state.”
And he wasn’t the only critic.
More than 1,000 protesters gathered outside the country’s supreme court, where fireworks were set off and tyres were burnt.
One expert said that regulatory clarity is vital in order to avoid confusion, and Blockchain technology can help resolve any confusion.
“El Salvador’s rush into digital assets is causing scepticism amongst many, as regulatory clarity is still lacking ahead of September 7th’s ‘go-live’ date,” said Julian Sawyer, CEO of Bitstamp, the world’s longest-running cryptocurrency exchange.
“This is further proof that regulation needs to exist to not only level the playing field so we are all adhering to the same rules, but also so that we can truly welcome the next hundred million people to digital assets,” said Sawyer.
“Without clarity on regulation, grey areas can lead to confusion. That’s why we have always prioritised compliance and welcomed regulators into conversations so that we can get ahead of issues before they arise,” said Sawyer.
“Blockchain technology is fantastic and has a huge amount of benefit in digitizing and changing financial services,” he added. “However, protesters’ concerns are valid if a framework is not shared, bitcoin does have huge price changes, there needs to be another layer of translation so that Salvadorians are not paying a high transaction cost without knowing it (i.e. if price of bitcoin changes while exchanging value).”
“No doubt, however, this is a big deal for the industry,” he concluded. “We expect that digital assets are going to change the makeup of financial systems and this is the first action on the geopolitical level that has regulators, citizens and the digital asset community scratching their heads.”