Free El Salvador: Launching Bitcoin as Legal Tender Case Study Solution | Assignment Help

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Written by Gary F. Smith
Publish Date: 2024-12-04

Harvard Case - El Salvador: Launching Bitcoin as Legal Tender

"El Salvador: Launching Bitcoin as Legal Tender" Harvard business case study is written by Laura Alfaro, Carla Larangeira, Ruth Costas. It deals with the challenges in the field of Business & Government Relations. The case study is 35 page(s) long and it was first published on : Mar 29, 2022

At Fern Fort University, we recommend that El Salvador carefully re-evaluate its decision to adopt Bitcoin as legal tender, considering the significant economic, social, and political risks involved. We propose a phased approach to Bitcoin adoption, focusing on building robust infrastructure, fostering public education, and ensuring regulatory clarity before fully integrating Bitcoin into the Salvadoran economy.

2. Background

This case study examines El Salvador's bold decision in 2021 to adopt Bitcoin as legal tender, making it the first country in the world to do so. The decision was driven by President Nayib Bukele's vision to attract foreign investment, boost financial inclusion, and diversify the economy away from reliance on the US dollar. However, the implementation faced significant challenges, including volatility in Bitcoin's price, lack of public understanding, and concerns about its environmental impact.

The main protagonists of the case are President Bukele, who championed the Bitcoin adoption, and the Salvadoran people, who have experienced both the potential benefits and the risks associated with this radical economic experiment.

3. Analysis of the Case Study

This case study can be analyzed through the lens of several frameworks:

  • Economic Framework: The decision to adopt Bitcoin as legal tender was driven by the desire to attract foreign investment, boost financial inclusion, and diversify the economy. However, the volatility of Bitcoin's price and the lack of regulatory clarity created significant economic risks.
  • Political Framework: The decision was highly controversial, with strong opposition from the International Monetary Fund (IMF) and concerns about the potential for corruption and money laundering.
  • Social Framework: The adoption of Bitcoin has had a mixed impact on the Salvadoran population. While some have benefited from increased access to financial services, others have faced challenges due to the lack of understanding and the volatility of Bitcoin's price.
  • Technological Framework: The adoption of Bitcoin requires significant investment in infrastructure, including digital wallets, payment processing systems, and cybersecurity measures.

4. Recommendations

  1. Phased Adoption: El Salvador should adopt a phased approach to Bitcoin adoption, starting with pilot programs and gradually expanding its use over time. This allows for monitoring the impact of Bitcoin on the economy and addressing any challenges that arise.
  2. Infrastructure Development: The government should invest in robust infrastructure, including digital wallets, payment processing systems, and cybersecurity measures, to ensure the smooth functioning of Bitcoin transactions.
  3. Public Education: The government should launch a comprehensive public education campaign to educate the population about Bitcoin, its benefits, and its risks. This will help to build trust and confidence in the new currency.
  4. Regulatory Clarity: The government should establish clear regulations for Bitcoin, including anti-money laundering measures, consumer protection guidelines, and tax policies. This will provide certainty for businesses and investors and mitigate the risks associated with Bitcoin.
  5. Diversification: El Salvador should continue to diversify its economy beyond Bitcoin, investing in other sectors with strong growth potential. This will reduce the country's reliance on a single asset and mitigate the risks associated with its volatility.

5. Basis of Recommendations

These recommendations are based on the following considerations:

  1. Core Competencies and Consistency with Mission: El Salvador's core competencies lie in its agricultural sector and its tourism potential. Bitcoin adoption should align with these strengths and contribute to economic diversification.
  2. External Customers and Internal Clients: The recommendations consider the needs of both Salvadoran citizens and international investors. Public education and regulatory clarity are crucial for building trust and attracting foreign investment.
  3. Competitors: El Salvador should consider the experiences of other countries that have experimented with cryptocurrencies, both successful and unsuccessful, to learn from their experiences and avoid pitfalls.
  4. Attractiveness: While Bitcoin adoption may offer potential benefits, it also carries significant risks. The recommendations aim to mitigate these risks by focusing on infrastructure development, regulatory clarity, and diversification.

6. Conclusion

El Salvador's decision to adopt Bitcoin as legal tender was a bold experiment with significant potential benefits and risks. While Bitcoin adoption can potentially boost financial inclusion and attract foreign investment, the lack of regulatory clarity, the volatility of Bitcoin's price, and the potential for social disruption necessitate a cautious and phased approach. By focusing on infrastructure development, public education, and regulatory clarity, El Salvador can mitigate these risks and maximize the potential benefits of Bitcoin adoption.

7. Discussion

Other alternatives not selected include:

  • Full-scale adoption without any safeguards: This would expose El Salvador to significant economic and social risks, including price volatility, financial instability, and social unrest.
  • Abandoning Bitcoin altogether: This would be a missed opportunity to explore the potential benefits of cryptocurrency, but it would also avoid the risks associated with its adoption.

The risks associated with the recommended approach include:

  • Slow adoption: A phased approach may be slower than a full-scale adoption, potentially delaying the benefits of Bitcoin adoption.
  • Resistance to change: There may be resistance from certain segments of the population to the adoption of Bitcoin.
  • Technological challenges: Implementing robust infrastructure and ensuring cybersecurity may be challenging.

8. Next Steps

  1. Establish a task force: The government should establish a task force to oversee the implementation of the phased Bitcoin adoption strategy.
  2. Pilot programs: The government should launch pilot programs in specific sectors to test the feasibility of Bitcoin adoption.
  3. Public education campaign: The government should launch a comprehensive public education campaign to inform the population about Bitcoin.
  4. Regulatory framework: The government should develop a clear regulatory framework for Bitcoin, including anti-money laundering measures, consumer protection guidelines, and tax policies.
  5. Infrastructure investment: The government should invest in infrastructure, including digital wallets, payment processing systems, and cybersecurity measures.
  6. Monitoring and evaluation: The government should monitor the impact of Bitcoin adoption on the economy and make adjustments to the strategy as needed.

By taking these steps, El Salvador can navigate the challenges and opportunities of Bitcoin adoption, maximizing its potential benefits while mitigating its risks.

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Case Description

In June 2021, Nayib Bukele, El Salvador's president, surprised the world with the announcement that the country would adopt bitcoin as legal tender, becoming the first nation to do so. Bitcoin was mostly used for trading and had one of the most volatile track records among assets. Yet, crypto adoption as a medium of exchange was starting to gain pace worldwide. Bukele claimed it would be a boon for financial inclusion, investment, innovation, and economic development. El Salvador's $27 billion economy suffered from persistently low growth, high public debt, and a strong dependence on remittances, which could potentially become cheaper and faster to access in bitcoins. The Bitcoin plan was met with both enthusiasm from Bitcoin supporters and skepticism from credit agencies and multilateral finance institutions, which believed it could bring macroeconomic instability to the local economy. Was bitcoin a viable currency for Salvadorans? Or, as some observers pointed out, was Bukele's plan another sign of weakened governance in his administration?

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