Bitcoin in the Eyes of Trump and El Salvador’s Finance Minister

On June 7, 2021, former US President Trump said in an interview that Bitcoin is a fraud and must be strictly regulated. He also said that Bitcoin is challenging the US dollar, and he insists on supporting the US dollar.

Bitcoin challenged the US dollar in November 2020. Many important financial institutions in the United States began to discuss this issue at that time. Although this issue has been discussed before, it was only discussed in the cryptocurrency circle without the participation of financial institutions. The only exception was the speech of the International Monetary Fund at the Bank of England in October 2017. At that time, it mentioned that in some countries, digital currency may replace legal currency as the national currency, and proposed that digital currency be accepted into the SDR. Except for the speech in 2017, no compliant financial institutions or central banks discussed this view.

After November 2020, the view that Bitcoin is challenging the US dollar has been emerging. Trump's statement indicates that Bitcoin is still challenging the US dollar. Bitcoin is challenging the US dollar not because of its high market value. In fact, the market value of Bitcoin is much lower than that of US dollar assets. Bitcoin is challenging the US dollar because a large number of cross-border transactions are using Bitcoin (this is the data provided by JPMorgan Chase Bank's February 2021 report). According to the Digital Currency Areas theory, the most used currency for cross-border payments is the world's reserve currency, so Bitcoin is challenging the US dollar.

Today, one of the reasons why many central banks around the world are developing central bank digital currencies (CBDCs) is to compete with Bitcoin. In addition, CBDCs can promote economic development. Both the Bank of England and the Bank of Japan admit that they are developing CBDCs to promote economic development, and the Federal Reserve also regards CBDCs as a high-priority project and launched the Hamilton Plan.

When Trump expressed this view, many things were happening behind the scenes. For example, British financial commentator Chris Skinner suggested in April that a country could use Bitcoin as its legal currency because its legal currency was not strong. The country has not yet implemented it. El Salvador took the lead in declaring Bitcoin as its legal currency on June 9, and in early 2021, another central bank was considering purchasing Bitcoin for foreign exchange storage.

But it is still not easy for Bitcoin to challenge the US dollar. The International Monetary Fund notified El Salvador on June 11 that using Bitcoin as legal tender would cause serious macroeconomic problems. A few days later, on June 17, the Minister of Finance of El Salvador clarified that Bitcoin would not replace the US dollar as legal tender.