El Salvador was the first, and now the Central African Republic and Panama will follow: Cryptocurrencies will become legal tender. What are their goals?
Currently, it looks as if cryptocurrencies are not only establishing themselves as an investment object for investors but also increasingly as a way of conducting day-to-day transactions. Therefore, Panama would like to become the second Latin American country to allow Bitcoin and other cryptocurrencies as normal means of payment in the future.
Last Wednesday, the Central African Republic became the second country in the world to announce that it would allow Bitcoin as a legal tender. And in early September, El Salvador became the first country to officially accept bitcoin as legal tender. Every trader who is technically able to do this must therefore accept the cryptocurrency, and taxes can also be paid in Bitcoin there and in Panama. The US dollar is the national currency in both countries.
Many positive effects
A pattern can be observed between the countries that are introducing or want to introduce cryptocurrencies, explains Philipp Sandner, head of the Blockchain Center at the Frankfurt School of Finance & Management, to Cityryde.com.According to the expert, it is mostly countries in which institutions do not work well or do not function well, which are based on Bitcoin. Bitcoin is a kind of substitute institution when a state has not been able to establish good and stable institutions such as exist in Germany, for example.
There are many aspects that could also be useful in everyday life. According to Benedikt Faupel, blockchain expert at the digital association Bitkom, countries that are currently introducing cryptocurrencies as a means of payment generally expect three advantages: “On the one hand, greater independence from the US dollar, and on the other hand, faster transfers from abroad, which are associated with lower transaction fees, since a lot of money from abroad, for example from family members, is currently flowing into these countries.
Thirdly, a significant proportion of the population who do not have a bank account can use a smartphone app to store values digitally and also pay with them,” Faupel told Cityryde.com.
Sandner also points to the positive effects of cryptocurrencies, which have also been shown in recent weeks. For example, refugees used them in the Ukraine war to carry values across borders. Also, due to their scarcity, crypto assets could serve to mitigate the risk of losing purchasing power in times of inflation.
However, the actions taken by Panama and El Salvador are also met with skepticism: critics fear that money laundering will be made easier. Experts claim that this could strengthen Panama’s reputation as a place with a lack of financial transparency. For example, the International Monetary Fund (IMF) asked El Salvador to abolish Bitcoin as a legal tender. The risks are enormous, “significant risks to financial stability, financial integrity and consumer protection” loom, the IMF executive board said.
At the very least, the question arises as to whether serving the people is actually the priority for Panama and El Salvador. The experiences in El Salvador would show that people don’t take Bitcoin very well; it’s not used very much there, says Stefan Hofrichter, Head of Global Economics & Strategy at Allianz Global Investors (AGI). There were even protests there because of Bitcoin.
“The countries are not primarily concerned with ordinary citizens being able to use Bitcoin for their daily payment transactions, nor with savings when sending international transfers from migrants, as is often said,” emphasizes Christian Ambrosius, economist, and expert on Latin America at the FU Berlin. According to him, these are advanced arguments.
Discretion for capital owners
Then why the introduction? “The economic model of countries like Panama is based on being an attractive target for globally mobile capital, be it to avoid taxes or to launder money,” notes Latin America expert Ambrosius. Moreover, by accepting Bitcoin as a means of payment, these countries wanted to offer attractive conditions for capital owners who also hold Bitcoin in their portfolio and are looking for discretion, the expert emphasizes.
“In times when the regulation of the traditional financial market has become stricter, Bitcoin offers an important niche,” Ambrosius continues. Countries such as Panama and El Salvador, in particular, where the dollar is also a legal means of payment, could play out an attractive location advantage here.
“Unsuitable as a means of payment”
Apart from that, given the massive price fluctuations, the practical question arises as to whether cryptocurrencies are even suitable as a means of payment. “Due to the high volatility, the so-called cryptocurrencies are neither suitable as a means of payment nor as a store of value; they are more of an object of speculation,” explains AGI chief economist Hofrichter.
In the past twelve months alone, the Bitcoin price has fluctuated between around $30,000 and almost $70,000 and is currently around $40,000. The economist Hofrichter does not regard Bitcoin & Co. as a “currency” anyway since they do not or only inadequately meet three requirements – means of payment, unit of account, and store of value. In addition, according to Hofrichter, it is questionable to what extent processing using cryptocurrencies is really secure.
Will there be regulation?
Does the introduction nevertheless mean that cryptocurrencies will establish themselves globally? The process has long since begun, says Sandner. But it could take years or decades. However, the expert emphasizes that Bitcoin & Co. will not prevail in the EU or in the USA as a currency but as an investment object.
For blockchain expert Faupel, too, cryptocurrencies are already established internationally: ” Bitcoin and other cryptocurrencies can become even more relevant when used as a means of payment. ”
But what about the warning from the IMF’s experts? Ambrosius suspects that sooner or later, the pressure on countries like Panama or El Salvador will increase to introduce transparency criteria with regard to Bitcoin so that payment flows in digital currencies can be tracked. ” However, it has, of course, always been the case that attempts at regulation have always followed the new financial products and financial innovations. “
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