The Future of Currencies

The recent adoption of Bitcoin as their legal tender by El Salvador has raised a lot of eyebrows from foreign and economic policymakers. However, to those familiar with the history of the nation in experimenting with new currencies this should not come as a surprise. Historically, the official currency of El Salvador (the colon) has failed to deliver economic stability. Their latest attempt at revolutionizing their economy has raised some interesting questions about the future of traditional currency systems.

The prospect of adopting cryptocurrencies as the official legal tender poses certain interesting economic implications. The most obvious one being the loss of control over the money supply in the economy. The Central Banks are responsible for buying and selling bonds to control money supply in the economy. This in turn helps the Central Bank guide the future rates of inflation in the economy. With the introduction of cryptos as an official tender, these controls go out the window. So, it would be interesting to see how Governments of these countries cope without their traditional policy tools.
Setting aside the economic uncertainty, the lack of access to the internet in El Salvador makes any logical argument in favor of this move impossible. Although transacting via Bitcoin will lead to lower transaction fees, is that reduction really worth the environmental cost of mining?

The real question here is can we expect a domino effect? It is possible that Panama could follow along the same lines as it has recently unveiled a bill to adopt Bitcoin as legal tender. However, this doesn’t mean you should convert all your cash to cryptocurrencies. It is highly unlikely that the bigger economies like the United States or Canada would give up control over their traditional policy tools. Plus, cryptocurrencies still need to overcome problems like volatility, and high energy costs. Although Ethereum 2.0 is much more energy-efficient it is still quite volatile, and likely to stay that way for a while.
Even if we do not see too many countries adopting Bitcoin or Ethereum, some countries will adopt blockchain technology. We can expect countries like Canada and the United States to come up with their own Blockchain-based digital currencies. This would allow them to keep control of traditional policy tools while pretending to accept this revolutionary idea of decentralization.