CAMBRIDGE – El Salvador this month became the first country to adopt a cryptocurrency – in this case, Bitcoin – as legal tender. I say the first, because others might follow. But they should think twice, because the idea is highly dubious – and likely to be economically dangerous for developing countries in particular.
I will admit that I don’t understand the need for cryptocurrencies at all. Like many economists, I fail to see what problem they solve. They aren’t well designed to fulfill any of the classic functions of money – a unit of account, store of value, or means of payment – because their prices are so extraordinarily volatile. This volatility is not surprising, because cryptocurrencies are backed neither by reserves nor by the reputation of a well-established institution, such as a government or even a private bank or other trusted corporation.
In fact, Bitcoin and its fellow cryptocurrencies were born from an anarcho-libertarian distrust of central banks. True, many central banks, especially in developing countries, have a history of debasing their currencies. But adopting Bitcoin as legal tender makes little sense for El Salvador.