Dangerous Bitcoin Experiments in Developing Countries… The key is ‘dollar dependence’

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After El Salvador, a developing country in Latin America, recently adopted Bitcoin as a fiat currency, other countries are also experiencing a butterfly effect.

Tanzania, Panama, and even Mexico have started considering the legalization and legalization of Bitcoin, but the move is not serious to see as a temporary wish.

So, why do these countries choose Bitcoin as their fiat currency? As many media have already pointed out, the depreciation of the currency and the lack of financial infrastructure are the primary reasons.

In the case of El Salvador, which was the first in the world to recognize Bitcoin as a fiat currency, its economy is in serious trouble. The economy has bottomed out after going through a modern history marked by civil wars, dictatorships, coups, and corruption, and as a result, the per capita gross domestic product (GDP) is only around $4,000.

Society is also confused. The crime homicide rate is the highest in the world, and the size of the criminal organization is larger than the size of the police or military, so security is very unstable. For this reason, while tourism and tourism income is low, exports are limited to coffee, as in other Latin American countries.

Therefore, many workers in El Salvador work abroad because they cannot find a job. According to the World Bank (WB) data, the amount of domestic remittances of overseas workers in El Salvador in 2019 amounted to US$6 billion (6.687 trillion won), accounting for 22% of the gross domestic product (GDP) during the same period.

The El Salvador government believes that if they receive the money they send through a financial institution in Bitcoin, they will not have to depend on foreign financial institutions, but also block foreign currency outflow and reduce fees.

However, a closer look reveals that there are other clear reasons for El Salvador’s designation of Bitcoin as a fiat currency. It is a decision made to overcome the economic crisis. In particular, it is necessary to consider El Salvador’s dependence on the dollar.

El Salvador is already using the dollar in real life with its currency collapsing. In the midst of this, the Corona Pandemic has had an adverse impact on El Salvador. While exports continue to decline, public debt continues to rise.

If you look at the 2020 import and export statistics of the Central Bank of El Salvador right now, El Salvador’s exports last year decreased by 15.4% compared to 2019. On the other hand, public debt stood at $2.773 billion, higher than the 2017-2019 total of $2.555 billion.

In response, Moody’s, an international credit rating agency, downgraded its credit rating outlook from positive to negative earlier this year, estimating that El Salvador’s public debt-to-GDP ratio will reach 90% in 2022 from 70% in 2019. Even if it is not, the economic situation is difficult, but even the investment is being neglected as the credit rating has been downgraded.

Most countries that want to designate Bitcoin as a fiat currency have this problem. Countries with low value of their currency, weak financial infrastructure, and high dependence on the dollar are turning their eyes to new currencies.

Countries like this are more problematic after the pandemic. This is because a faster-than-expected rate hike is expected to prevent inflation from rising as unprecedented stimulus measures are pouring in around the world.

Minutes of the minutes of the US central bank’s Federal Reserve (Fed) meeting in April have already been published in which there was an opinion to discuss tapering the bond buying program in the future. A growing number of Fed members are predicting the timing of a policy rate hike next year sooner than expected.

If interest rates are raised while asset values ​​and inflation are soaring due to the maximized liquidity of the dollar, developing and emerging countries may not have the strength to survive the economic crisis. A typical example is the bankruptcy of Latin American countries after the US interest rate hike in 1985, and Korea, which suffered the IMF crisis after the dollar went out, was no exception.

Of course, it is unclear whether it will be possible for these countries to designate a Bitcoin fiat currency and reduce their dependence on the dollar. The International Monetary Fund (IMF) and the World Bank have already expressed strong concerns and have refused to provide legal monetary support. IMF spokeswoman Gary Rice said at a press conference that “the adoption of Bitcoin as a fiat currency could cause macroeconomic, financial and legal problems. .

For this reason, some analysts say that the real purpose of these countries is not the actual use of Bitcoin, but elsewhere. The goal is to attract various investments related to cryptocurrency, create jobs, and build a bitcoin mining farm.

El Salvador, dreaming of the 21st century version of El Dorado (Golden Land), coincidentally means savior in Spanish. It remains to be seen whether Bitcoin can actually become the savior of El Salvador.

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