El Salvador, a small coastal country in Central America, on became the first in the world to make Bitcoin, a digital currency, legal.

Lessons for India

While there are many precedents El Salvador sets for a global debate on cryptocurrency, we explore what this means in the Indian context.

(1) Not a precedent for monetary policy

• The development in El Salvador changes little in terms of Indian monetary calculations around cryptocurrencies.
• The dynamic underpinning the whole move is that El Salvador has no monetary policy of its own and hence, no local currency to protect.
• The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve.
• The move is in part motivated by loose and expansionary Federal Reserve policy.

(2) Coexistence with USD

• The dollar will continue to remain the dominant currency in the country and Bitcoin would exist side by side.
• Indeed, some analysts have pointed out how bitcoinization might change nothing on the ground if “legal tender” is to be considered by its strict legal definition.
• However, as a result of this development, El Salvador becomes a most interesting case study of how the dollar and bitcoin would coexist side by side, and how that would play out for Bitcoin adoption.

(3) Not merely currency but technology

• The overall use of Bitcoin appears less motivated by its use as a currency and much more by the image and investment boost this could give the country towards innovation.
• El Salvador believes that this move will be good for luring “technology, talent, and new ideas” into the country.
• The move into Bitcoin ties in with larger efforts to revive a stalling economy and bring back growth into the country post-Covid.

(4) Potential shift in remittances

• The impact Bitcoin has on these remittance inflows would be worth monitoring for India, which is home to the largest remittance market in the world.
• Remittances make up close to 20% of El Salvador’s GDP with flows approximating $6 billion annually.
• Many citizens lack a bank account and digital banking has low penetration.
• In this scenario, there are multiple intermediaries in the remittance chain who take cuts of as high as 20%.

(5) Impact on money laundering

• The implication of this move for money laundering is unclear at the moment.
• Currently, El Salvador is not considered deficient under the FATF money laundering requirements.
• However, with large scale cryptocurrency inflows and outflows, it would be expected that El Salvador would comply with the 2019 FATF guidance on Virtual Currencies.

Conclusion

• The overall takeaway for India from the El Salvador case is not in the monetary sense at all.
• This is the wealth that India has in spades and has barely protected with policy.
• While deliberations continue in India on the monetary and financial regulations around cryptocurrency.
• It is important that attention be paid to incentives for India’s developers working on key innovations in the space.

Back2Basics: Bitcoin

• Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
• Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
• The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.
• The currency began to use in 2009 when its implementation was released as open-source software.

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