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Explainer: What does El Salvador's bitcoin push mean for cryptocurrency?

El Salvador has adopted bitcoin as legal tender, the first country in the world to do so.

The bill says all shops, individuals, and businesses are obliged to accept Bitcoin.

President Nayib Bukele has touted its potential to help Salvadorans living abroad to send remittances back home.

"In the short term this will generate jobs and help provide financial inclusion to thousands and thousands in the informal economy. And in the medium- and long-term we hope that this small decision can help us push humanity at least a tiny bit, into the right direction."

But what does the move mean for bitcoin as a mainstream currency?

And will be bitcoin be used like dollars?

Cryptocurrency Correspondent Tom Wilson says it’s too soon to tell.

“So this is the really big question. No one knows exactly what the reaction of people in El Salvador is going to be to this. People aren't obliged to use Bitcoin as they do dollars, U.S. dollars, which for the last 20 years has been El Salvador's currency. There are two big problems with Bitcoin and its push to be used as a currency, which is what it was designed for, the first one being that it's very volatile. This means that prices tend to change quite dramatically every day, and that means that it's hard to use for commerce. It's hard for businesses to set prices using bitcoin. The second problem, which is really going to decide how widely Bitcoin is actually used, is legal tender is the fact that Bitcoin is actually quite difficult to use. It demands quite a lot of technical know how, is quite fiddly to set up accounts with exchanges and so on. So it's really too soon to yet say exactly how widely it's going to be used.”

So does this make bitcoin a currency?

“So Bitcoin's been around for about 12 years, and it was really designed to be used as a currency until now, though, it hasn't really been used. Like we use the pound, like we used yen, like we use the dollars. Investors tend to see Bitcoin as more akin to gold as a kind of asset in which they can keep key value to keep a store of value. So it's really unclear exactly how widely Bitcoin is going to become used as a currency or whether indeed other countries beyond El Salvador start to accept Bitcoin as legal tender in the same way that the Central American country has done."

El Salvador's experiment will provide the first opportunity for analysts to gauge the cryptocurrency's impact on an economy.

Some warn the increased usage of cryptocurrencies will reduce the effectiveness of monetary policy.

"Many emerging market economies rely on remittances as part of their GDP. That means that workers from, say, El Salvador, who are based in foreign countries, the United States and so on, often send money back to their family or friends there. That means that Bitcoin is seen in theory as being very usable in emerging market economies. In theory, it's quaint, it's convenient. It's easy to send money across borders. So some analysts think that if Bitcoin takes off in El Salvador, if it starts to be used more widely for remittances, this mean this means that the same might happen in other emerging market economies. Of course, that comes with the caveat. It's really too soon to tell exactly whether other emerging markets are really going to start to accept Bitcoin as legal tender in the same way that El Salvador has.

Video Transcript

- El Salvador has adopted Bitcoin as legal tender, the first country in the world to do so. The bill says, all shops, individuals, and businesses are obliged to accept Bitcoin. President Naya Buechler has touted its potential to help Salvadorians living abroad to send remittances back home.

- In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy. And in the medium and long term, we hope that this small decision can help us push humanity at least a tiny bit into the right direction.

- But what does the move mean for Bitcoin as a mainstream currency? And will Bitcoin be used like dollars? Cryptocurrency correspondent Tom Wilson says, it's too soon to tell.

- So this is a really big question. No one knows exactly what the reaction of people in El Salvador is going to be to this. People aren't obliged to use Bitcoin as they do dollars, US dollars, which for the last 20 years has been El Salvador's currency.

There are two big problems with Bitcoin, and its push to be used as a currency, which is what it was designed for. The first one being that it's very volatile. This means that prices tend to change quite dramatically every day, and that means it's hard to use for commerce. It's hard for businesses to set prices using Bitcoin.

The second problem, which is really going to decide how widely Bitcoin is actually used is legal tender is the fact that Bitcoin is actually quite difficult to use. It demands quite a lot of technical know how, so it's really too soon to yet say exactly how widely it's going to be used.

- So does this make Bitcoin a currency?

- So Bitcoin has been around for about 12 years. And it was really designed to be used as a currency. Until now, though, it hasn't really been used like we used the pound, like we used yen, like we use the dollars. Investors tend to see Bitcoin as more akin to gold, as a kind of asset in which they can keep key value, to keep a store of value.

So it's really unclear exactly how widely Bitcoin is going to become used as a currency or whether indeed other countries beyond El Salvador start to accept Bitcoin as legal tender in the same way that a Central American country has done. El Salvador's experiment will provide a first opportunity for analysts to gauge the cryptocurrency impact on an economy. Some warn the increased usage of cryptocurrencies will reduce the effectiveness of monetary policy.

- So many emerging market economies rely on remittances as part of their GDP. That means that workers from, say, El Salvador who are based in foreign countries, the United States and so on often, send money back to their family or friends there. That means that Bitcoin is seen in theory as being very usable in emerging market economies. In theory, it's quaint, it's convenient, it's easy to send money across borders.

So some analysts think that if Bitcoin takes off in El Salvador, if it starts to be used more widely for remittances, this mean-- this means that the same might happen in other emerging market economies. Of course, that comes with the caveat. It's really too soon to tell exactly whether other emerging markets are really going to start to accept Bitcoin as legal tender in the same way that El Salvador has.