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El Salvador starts a dangerous experiment

A Bitcoin machine in El Salvador

The cryptocurrency prevents a clear exchange rate for the country.

(Photo: Reuters)

Hawala: This is the name of informal payment systems that work astonishingly well in many emerging countries, sometimes even in crisis areas. They are also used for transfers home to their families by people who have found work in rich countries.

The Hawalas are often based on relationships or acquaintances. You send money by simply crediting it to the recipient. At some point later, the balance may have to be settled, but not for every single payment.
El Salvador is now introducing a kind of hawala. The only difference is that relational trust is not used as the basis, but rather the blockchain of bitcoins. A so-called Lightning network is used here, in which every payment no longer has to be recorded in the blockchain, which saves time and money.

With this electronic hawala, El Salvador wants to solve typical emerging market problems: payment transactions that are too expensive, especially for transfers from abroad, and too few bank accounts.

This will make the country the scene of a huge, fascinating experiment. That is where it will be seen whether Lightning works on a large scale. But the question remains whether the risk is really worth it.

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Because El Salvador exchanged its own currency for the dollar 20 years ago. So the country has not had any urgent currency problems so far, but it is holding one. Because in the future it will live with two currencies: dollars plus bitcoin. In contrast to the abolition of the local currency, the colon, this time it cannot define a fixed exchange rate.

On the contrary, Bitcoin fluctuates wildly in terms of dollars. And as for the lack of bank accounts: Mobile banking in Africa shows that there are also solutions without Bitcoin. For cross-border payments, there are now innovative offers such as Wise, which can be cheaper than traditional methods.

Ultimately, cryptocurrencies around the world are a huge experiment that nobody knows how it will turn out. If at some point the fascination with Bitcoin fades, the value of which depends solely on this fascination, then there will be great financial damage. And past crises in the financial sector have shown that, in the end, they are manageable for rich countries. In poor countries, on the other hand, they can cause devastating economic and social damage.

More: “An experiment out of this world”: El Salvador introduces Bitcoin as its currency on Tuesday

Hasan Sheikh
Hasan, who loves technology and games, is studying Computer Engineering at Delhi JNU. He has been writing technology news since 2016.


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