Friends have asked what my thoughts are about El Salvador adopting BitCoin. My auto-generated response was “um, I’m not sure but I don’t think it is a good thing.” In an attempt to better understand Bitcoin in El Salvador, I will now answer some questions that have come up.
- “What even is BitCoin? Oh cryptocurrency, yeah, what’s that?”
Bitcoin is a form of cryptocurrency or digital money. It doesn’t exist in physical form and is exchanged using the Internet. Now, you might say that regular money can be exchanged using the Internet. “How is that not the same thing?” you might be asking, but only my follow-up questions are allowed.
Bitcoin started anonymously in Japan in the midst of the 2008 financial crisis. The founders and followers of crypto believe in a myth, as we all do (money is fiction after all), that money can operate best outside the control of government. There is a reason for this, but first a little more context.
See, a long time ago money was linked to gold. This was known as the “gold standard.” The amount of money floating around in the world was linked to the amount of gold the government kept locked away in a secured vault. In 1971, Nixon completely abandoned the link to gold. This meant that the value of money was now determined by a number of factors including the decisions of some bureaucrats in DC. At times, more money is added, meaning that the value of money goes down, and at times there is less money and the value goes up. These adjustments that the government can make have an impact on people, making these decisions inherently political.
The founders of crypto believe that the government should not make these adjustments. That money should be apolitical and that instead a computer or an algorithm should make these adjustments (even though this is still inherently political because it still has an impact on people). Records are kept in what is called a “blockchain” and these exchanges are verified, a practice called “mining,” which requires supercomputers and an insane amount of energy.
- “Can it be used to purchase things or pay bills?”
Yes, it is now an official tender in El Salvador, meaning it needs to be accepted everywhere. Elsewhere in the world, there are some vendors that will accept bitcoins as a form of payment, but you can also exchange it to cash using an app that will transfer the value of your coin to your bank account. El Zonte, a small beach town in El Salvador, has been operating with bitcoins for the past two years. Of course, one has to have access to a smart phone and reliable internet in order to participate effectively.
- “Why did El Salvador adopt BitCoin as a national currency?”
This is a very complicated question with answers coming from multiple perspectives (economics, governance, or social). The rhetoric of the president of El Salvador, Nayib Bukele, is that El Salvador is looking towards…