Country-wide Bitcoin adoption a mixed bag for national economies

Bitcoin offers an alternative for purchasing goods and services, though most countries don’t consider it legal tender, and the economic impact of it becoming a mainstream payment option is unclear. 

Only two countries have adopted Bitcoin ( BTC ) as legal tender. El Salvador became the first country in the world to adopt Bitcoin in September 2021 , and the Central African Republic followed suit in 2022 . 

El Salvador’s crypto treasury is $58 million in profit, according to the Nayib Bukele Portfolio Tracker website. 

The World Bank Group said the country’s economy has shown signs of improvement since 2021 thanks to public investment and tourism, among other factors. 

In 2021, El Salvador’s economy grew by 11.2% before leveling out and growing by 2.6% in 2022 and 2.7% in 2023. Source: World Bank Group

Lyn Alden, an investment researcher and founder of Lyn Alden Investment Strategy, told Cointelegraph that Bitcoin adoption as a medium of exchange in other countries would likely have “significant impacts,” some of which are hard to predict.

“I would expect that the majority of the impacts would be positive, and would expect that if Bitcoin reaches this level it will occur over a rather long period of time,” she said.

“Cross-border trade would likely be improved, especially in places like Africa, which has over 40 currencies, and Latin America, which has over 30 currencies.”

According to Alden, the current debt-based monetary system used in countries like the United States is incompatible with a sound currency like Bitcoin . 

She said the financial system would likely require an overhaul before Bitcoin could be used as a mainstream alternative for purchasing goods and services, such as the economy shifting to become more equity-based. 

Related: Stablecoin growth soars as crypto global mass adoption ramps up

“I do think the economy can handle it and would likely be improved by it, but the financial system would have to be significantly different. Nation states would likely have their power reduced due to a smaller role for seigniorage,” Alden said. Seigniorage, in this case, refers to the revenue the government makes from printing currency.

“Until then, nation states are an impediment to Bitcoin being used as a common medium of exchange by making every transfer a taxable event, with some notable exceptions like El Salvador.”

In August, Salvadoran President Nayib Bukele said the country’s adoption of Bitcoin hasn’t gone as far as he would have liked, but he thinks it’s a net positive for the country. 

Bitcoin mainstream adoption could be a mixed bag 

Alice Liu, lead researcher at CoinMarketCap, told Cointelegraph that mainstream Bitcoin adoption for purchasing goods and services would likely have “mixed economic impacts” if it were to become a reality.

On the positive side, Liu says it could boost financial inclusion, streamline cross-border transactions and reduce payment-processing costs. 

Related: Crypto mass adoption is just 12–18 months away — Yat Siu

It would also allow some countries to de-dollarize their economies and have more control over their economic policies.

“However, currently, the annualized 30-day volatility for Bitcoin is still around 50%, making it harder for businesses to manage pricing and financial planning,” Liu said.

“This shift would likely require central banks to implement coordinated and collective regulations around the use of Bitcoin, and it could challenge traditional banking systems and monetary policy control.”

Bitcoin and crypto in general have been hot topics in the run-up to the US election in November.

Former US President and 2024 Republican nominee Donald Trump has been very vocal about supporting Bitcoin and crypto, floating plans such as the potential for Bitcoin to be used as a reserve asset in the US if he is elected. 

Source: Pubkey

Liu says that using Bitcoin as a reserve asset is different from adapting it as legal tender, but it could “appeal as a reset mechanism,” given the US federal government’s debt of over $35 trillion and the “Federal Reserve’s struggle to implement effective monetary policies.” 

“Bitcoin’s fixed supply could prevent the overprinting of money, helping to curb inflation in the long term,” Liu said. 

“However, when using Bitcoin as a currency for daily transactions may come with challenges, such as volatility and infrastructure issues, speed, cost, wallet, DeFi UX and more.”

She thinks “the real challenge” for Bitcoin adoption will likely come from its integration into the global financial system and assets markets. 

“Robust regulations will be crucial to prevent market manipulation, ensure tax compliance, and secure transaction transparency,” Liu said.

In May 2023, the European Council adopted the first comprehensive legal framework for the crypto industry. 

Most countries and jurisdictions have been slow to create a framework for Bitcoin and the wider crypto market, with some outright banning its use. 

US dominance linked to the dollar, not Bitcoin 

Caroline Bowler, CEO of Australian crypto exchange BTC Markets, said countries with instability in their civil institutions and government operations, weak infrastructure and limp currencies would likely find a safe harbor in Bitcoin if adopted as legal tender. 

“This view is hard to understand from the developed world, where many have forgotten, or take for granted, what was required to get the monetary stability we now enjoy,” she told Cointelegraph. 

“Not so in countries such as Argentina or El Salvador where the ravages of inflation, civil war and dependency on the US have long left their mark.”

Both El Salvador and Argentina are among the poorest countries in the world. 

In May, some reports suggested that Argentina might consider emulating El Salvador’s approach to Bitcoin to help its ailing economy, though it hasn’t happened yet. 

Related: Bhutan has twice as much Bitcoin as El Salvador, says Arkham

Bowler says for a country like the US, the impact of adopting Bitcoin would “ricochet around the world” because its geo-political dominance is linked to the power of the dollar; unwinding it could “create global unrest and destabilize the existing world order.”

There are growing concerns that the US dollar could lose dominance as the world’s reserve currency and go-to for international transactions and commodity trades.

The intergovernmental organization BRICS, which comprises Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia and the United Arab Emirates, has been pushing for commodity trades using currencies other than the US dollar. 

The effect on the stablecoin market could also be wide-reaching. The five largest stablecoins by market cap are all pegged to the US dollar.

“A reality where the US would adopt Bitcoin suggests a world very different from the one we currently inhabit,” Bowler said.

“Instead, it is far more likely they will follow the Chinese and explore a digital US dollar via a central bank digital currency.”

Central bank digital currency (CBDC) is a digital form of a country’s fiat currency. It is centralized and backed by the nation’s central bank.

According to the Human Rights Foundation, which unveiled a CBDC tracker in November 2023, out of 193 existing governments worldwide, 16 have deployed a working CBDC to the public. Just 39 have built a pilot, and 64 are still in the research phase.

Bitcoin needs to be a store of value first 

Steven Lubka, managing director at Bitcoin platform Swan Bitcoin, told Cointelegraph there are “vanishingly few scenarios” where Bitcoin is likely to be adopted as a primary currency for purchasing where it has not first become a common store of value . 

“Using Bitcoin for purchases at a broad scale while most people still use US dollars as a unit of account introduced many frictions that make this scenario very unlikely,” he said. 

According to Lubka, Bitcoin’s largest benefits for modern economies “don’t come from having yet another payment rail,” but instead from providing a unique form of collateral or store of value. 

“Bitcoin adoption, and its benefits, are extremely path dependent, and store-of-value adoption must come first to realize later benefits from daily use currency,” he said.  

Related: Bitcoin outperformed nearly every asset class in past year — VanEck

Fisher Yu, co-founder and chief technology officer of Babylon Labs, creators of a self-custodial Bitcoin Staking Protocol, told Cointelegraph that mainstream adoption of Bitcoin as a legal tender would be positive overall.

Yu says the main benefit would be true asset ownership, which would make people feel safer and create more wealth that would grow the economy.

“Onchain activity will surge, the tax fee will cover the miner’s cost — which is exactly how Nakamoto wanted Bitcoin to work in the long run,” Yu said. 

“For the economy, the general public will finally have a mainstream digital asset they can literally own, rather than being held by a third party such as banks.”