World Bank rejects El Salvador’s request for technical assistance on Bitcoin

The World Bank on Wednesday denied the request for assisting El Salvador in implementing bitcoin as a legal tender. The international monetary institution cited the transparency issues with the cryptocurrency and the environmental hazards associated with bitcoin mining as the reasons for its rejection. This comes as El Salvador President Nayib Bukele had earlier introduced legislation that sought to make his country become the world’s first in adopting the digital token as legal tender in the economy alongside the US dollar. 

The Central American nation has been using the dollar as legal tender for the past two decades abandoning its own currency, the “colon”. The “official dollarisation” was done to curb inflation and increase trade with the US. On June 9, however, El Salvador’s parliament passed the new law to make Bitcoin a legal tender that will take effect in September as the market value for the digital token hit as high as US$38,200 the past week. 

While a geothermal Bitcoin mining project is in progress, and the launch of the golden visa program for Bitcoin-denominated investors is in the pipeline, according to a Bloomberg report, El Salvador’s implementation plan aiming to make the cryptocurrency acceptable nationwide within the 3-month deadline has stalled. The reason being, the World Bank outlined the regulatory oversight.

What does making Bitcoin a legal tender imply?

The use of bitcoin, as in any other country, is legal in El Salvador, but making Bitcoin a legal tender would imply that aside from the recipient, the payee will have to accept the cryptocurrency as a payment method. The legislation states, “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”. 

The legal tender of Bitcoin therefore would complicate the trading systems as the cryptocurrency is highly volatile. Although, El Salvador’s leader Bukele argued on Twitter saying that Bitcoin has “a market cap of US$680 billion” and if 1% of it is invested in El Salvador, that would increase our GDP by 25%.

Even as El Salvador ignored the massive market fluctuations that show Bitcoin’s weakness as a viable alternative to central bank currencies, the World Bank rejected its support given the digital token’s environmental and transparency shortcomings. Bukele meanwhile said that the Bitcoin “will have 10 million potential new users” and is “the fastest-growing way to transfer 6 billion dollars a year in remittances”. 

Nearly  6.5 million population in El Salvador lives overseas, mainly in the US, and sends financial support back home. Last year, in 2020, the remittances totalled US$5.9 billion, or 23% of El Salvador’s GDP. Given that the cryptocurrency felicitated effective transfers without bank charges, the remittances to the Salvadoran economy remains hazy as the daily wagers and the population at large may not be efficient in handling the cryptocurrency transactions.