Whilst bitcoin has become widely adopted by many who were in the past skeptical or ignorant to its potential as a whole, some say the adoption of bitcoin as an actual, state recognized currency is going too far.
The president of El Salvador, a country that continues to struggle with mass poverty, inequality and instability, announced at the Bitcoin 2021 conference in Miami that took place in June that bitcoin would be made legal tender, joining the US dollar.
Whilst President Nayib Bukele’s announcement drew huge applause from bitcoin proponents, financial giants criticised the move as reckless and counterproductive.
Are They Wrong?
One of the key problems facing the economy of El Salvador is a lack of financial inclusion by the poorer members of society, and the claim that bitcoin will in a sense help to address this is jumping the gun hugely.
Liquidity, Liquidity, Where Art Thou?
The US dollar, which many impoverished countries have been forced to adapt as a result of mismanagement of local fiat currencies, is legal tender in El Salvador. If a country’s economy is under stress, the adoption of the US dollar provides a form of stability allowing international trading to go on relatively unhindered when this is implemented as a solution.
Believers in bitcoin might be looking no further than pushing their mass-adoption agenda by praising this move. Mass adoption of bitcoin doesn’t sound so bad, but when looking at a country with a volatile economy, proposing the adoption of a volatile asset instead of the US dollar which brings with it stability is skewed thinking.
The US dollar accounts for more than half of all fiat money in the world, and the amount of dollars in circulation far outweighs the amount of bitcoin in circulation. In a foreign country, unless you’re frequenting an establishment run by crypto-enthusiasts, you’re more likely to be able to spend your dollars than your bitcoin. Liquidity is important.
Most of the bitcoin in El Salvador is not so much in circulation as it is being traded. Further market fluctuations could see a mass dumping of bitcoin in favour of the US dollar, and this would destroy all dollar liquidity, causing huge problems to add to the suffering economy’s long list.
When Will We Be Ready?
Systems like bitcoin’s lightning network are constantly looking for ways to make bitcoin more useful as a currency, but largely bitcoin is still an asset to be traded rather than a currency to be spent. If bitcoin is what we settle on in the crypto world, we’re going to need to see more technological innovation, more consensus stability, and most importantly a move away from the lion’s share of trading volume being on centralised exchange servers.
We need to rethink exchanges, how we use them and who we hold accountable for the security of our crypto assets.
New exchange models hope to pave the way for some of these developments.
Hybrid Model Exchanges
ByteDex is an exchange launching at the end of the month that will connect decentralised exchanges and the existing DeFi ecosystems of Tron, Binance Smart Chain and ethereum’s networks on a multi-chain exchange. The exchange will be a hybrid, retaining the functionality aspects provided by centralised managing authorities, such as the ability to purchase crypto using fiat and providing an intermediary service to centralised exchanges. This is a novel concept, and ByteDex will be amongst the first to launch such an ambitious hybrid model.
This kind of outside the box thinking will make or break the success of mass adoption.