What Does the Cryptocurrency Decline Mean for Bitcoin Countries? – Council on Foreign Relations

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By Noah Berman
December 21, 2022 9:13 am (EST)
El Salvador and the Central African Republic have made Bitcoin legal tender, but market volatility has undermined the experiment.
In recent years, several countries have begun to accept Bitcoin as a form of legal tender, hailing its potential to transform their economies. But in 2022, cryptocurrency markets collapsed: Since peaking at over $68,000 in November 2021, the price of Bitcoin has fallen to under $17,000. This volatility, underscored by the collapse of cryptocurrency exchange FTX and other crypto ventures, has brought new scrutiny to the industry and to the countries that have embraced digital assets.
Two countries have officially adopted Bitcoin as a legal tender: El Salvador and the Central African Republic (CAR). Though a legal tender designation typically requires only the government to accept a given currency, El Salvador’s so-called Bitcoin law, enacted in September 2021, mandates that businesses do so as well. 
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Meanwhile, other countries have indicated a willingness to adopt various cryptocurrencies as legal tender. In November 2022, the prime minister of Saint Kitts and Nevis, Terrance Drew, said Bitcoin Cash (a separate but related cryptocurrency) could become legal tender in his country in 2023. And the Swiss city of Lugano introduced plans in March of this year to let citizens pay local taxes in Bitcoin and two other cryptocurrencies. A handful of other countries, such as Belarus and Singapore, have facilitated cryptocurrency ownership by private individuals through tax incentives.
Proponents of Bitcoin’s value as a currency, including Salvadoran President Nayib Bukele, say it gives people without bank accounts access to financial services and improves the efficiency of remittance transfers from abroad, which are historically slow and expensive. Financial analysts say El Salvador, where over 70 percent of the population is unbanked and 20 percent of gross domestic product (GDP) comes from remittances, represents a prime testing ground [PDF] for Bitcoin’s potential.
Countries could also seek to prevent influence from outside governments or international financial institutions. El Salvador has used the U.S. dollar since 2001, and the CAR uses the CFA Franc, a regional currency pegged to the euro that has been denounced by critics for its many conditions, such as the requirement to deposit half of the currency’s reserves into France’s central bank. Lacking their own currencies makes these countries dependent on the monetary policies of other states, and some hope the stateless nature of Bitcoin can eventually serve as a guardrail against foreign financial control.  
Additionally, embracing Bitcoin is often part of an attempt to spur investment and woo tourists. The CAR has revealed plans to create a “crypto island” and a citizenship scheme based on cryptocurrency investment. El Salvador’s Bukele first announced that he would make Bitcoin legal tender at a cryptocurrency conference in Miami as opposed to in his home country.
As cryptocurrency valuations sink, critics say that legal tender designations have fallen short of their goals. A July 2022 study found that fewer than a quarter of Salvadorans still use the state-backed Bitcoin wallet, and many businesses reported reverting to cash-only transactions. Most remaining users were banked, young, and educated [PDF]. Meanwhile, the value of the at least $107 million that the country’s central bank invested in Bitcoin has fallen by over 60 percent, and tourism remains below prepandemic levels. 
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El Salvador’s decision “was pretty clearly a populist stunt by a populist leader who announced this at a time when crypto valuations were at a high and excitement around crypto was at a high and he thought it would be cool,” says CFR Senior Fellow Sebastian Mallaby.
Critics also point out that cryptocurrency adoption has complicated relationships with international institutions. In the CAR, low access to electricity and internet has inhibited Bitcoin’s adoption, but analysts say that the country’s pursuit of cryptocurrency has still put it at odds with regional institutions. And in El Salvador, Bitcoin could drive a wedge between the government and the International Monetary Fund (IMF), which has been critical of Bitcoin. With the country’s debt load rising and ratings agencies warning of a growing risk of default, analysts warn that the IMF is unlikely to give El Salvador a loan without a reversal of its cryptocurrency policy.
Countries have been enticed by Bitcoin’s potential for financial innovation, but different risk tolerances have led to a patchwork of international regulation. In China, nonstate cryptocurrencies have been banned outright. The European Union, meanwhile, has made progress on a bloc-wide regulatory framework, as member countries such as Malta and Portugal have leveraged loose rules to attract crypto investment. The United States has largely extended existing financial rules to the crypto industry, while leaving the door open for more regulations in the future.
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Some analysts say that Washington’s attempt to thread the needle on crypto regulation could do more harm than good. “If the [Securities and Exchange Commission] is going to go around talking about Bitcoin, and crypto more generally, and say ‘well, we’re looking at it,’ then they better actually do something,” Mallaby says. “Because people will get the idea that the government is watching it, and therefore it’s safe.” 
Though financial regulators have floated some proposals to create a global framework for crypto regulation, the level of international collaboration remains low. The IMF has warned that divergent regulatory paths will make it harder to coordinate down the line, raising the risk of financial volatility and giving bad actors more leeway to use cryptocurrency for criminal purposes.
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