Home » Cryptocurrencies: Should we follow El Salvador to make bitcoin legal tender? by Dr. M.Lallmahamood

Cryptocurrencies: Should we follow El Salvador to make bitcoin legal tender? by Dr. M.Lallmahamood

bitcoin and chart

Cryptocurrencies –  The adoption of digitalization in the financial system is no more considered as auxiliary services. In fact, our financial institutions are at high risk if we do not adopt the new digital age.

The question whether we should follow Venezuela or El Salvador to adopt Bitcoin as legal tender or not? I believe that it is not a viable proposition in the current climate. But this does not mean that we should ignore the use of blockchain technology.

Many governments around the world are looking at Central Bank Digital Coins (CBDC). Bank of England has put a team together to study the future of money since 2006, the Bank for International Settlements (BIS) is far more advanced than the academic community when it comes to the digital currency, and some central banks like China, France, Swiss, Singapore, Japan, Russia and South Africa are rolling out experiments in issuing digital currencies while Tunisia and Senegal have issued its digital coins. 

What would that mean to the Bank of Mauritius (BOM), the licensees (commercial banks and money changers), the consumers, the payment system and the interest rate in Issuing a legal tender digital currency? First and foremost, the financial stability of the overall economy and the commercial banking system remains ‘le prix Mondial’. As far as the issuance in itself is concerned, Section 35 (1) the Banking of Mauritius Act provides the sole right to BOM to issue a legal tender digital currency. 

The main reasons libertarians like bitcoin are because they claim that banks are unreliable and bitcoin does not require a bank a/c, the government prints too much money while bitcoin is capped, government intervention distorts supply and demand, and the government uses monetary policy for political reasons. While the above arguments may be true, the attractiveness of CBDC should not be omitted – at the outset, there is no cost to print and safeguard cash, and its ability to deter tax evasion & money laundering activities. There are also unanswered questions when it comes to CBDC such as; will BOM apply the same statutory reserve requirement on CBDC; are we talking about a national blockchain; how about payment infrastructures and real time gross settlement; what are the role of the commercial banks – in other words, would CBDC has an impact to commercial banks’ deposits and funding models and its effects on credit allocation. Other concerns are how about the insurance deposit scheme, and will every consumer hold an account with  BOM?

Despite the fact that CBDC has some advantages, particularly during the Covid-19 pandemic, the biggest challenges would be the adoption rate of CBDC. It is definitely a 10-20 year project in parallel – what is meant here, the adoption of CBDC and its usage depends on a fully ready eco-system – the digital island!. We will likely see some developments about CBDC and cryptocurrencies in the coming G7 Summit and similarly in the national budget 2021. 

Furthermore the bigger picture is the public sector applications are ultimately the most promising uses of this technology. We can name a few applications such as using blockchain to track healthcare data and the use of blockchain technology for a land property registry and at the registrar of companies, etc etc. To me, the blockchain economy is considered a new economic pillar for the Island. The economic benefits will have a positive impact across all the industries and the Central Bank Digital Currency, though, likely will be seen in adoption. 

Dr. Muniruddeen Lallmahamood