Steve Hanke, a professor of applied economics at Johns Hopkins University, has warned that El Salvador’s recent adoption of Bitcoin (BTC) as legal tender has the potential to “completely collapse the economy.”
Steve Hanke served as a senior economist under President Ronald Reagan’s administration from 1981 to 1982. Hanke has previously described BTC as a speculative asset “with a fundamental value of zero,” and in April, the 78-year-old tweeted, “Cryptocurrencies are the future of money. Bitcoin is not.”
Speaking with streaming financial news provider Kitco News on Tuesday, the university professor noted that BTC hodlers from regions such as Russia and China could now target El Salvador to cash out their holdings — essentially draining the country of its United States dollars:
“It has the potential to completely collapse the economy because all the dollars in El Salvador could be vacuumed up, and there’d be no money in the country. They don’t have a domestic currency.”
During the interview, the economist described the elected representatives in El Salvador who voted in favor of president Nayib Bukele’s Bitcoin law as “in a word, stupid,” and questioned how BTC could function as a legal tender in day-to-day transactions, in a country where most citizens rely on cash.
“You’re not going to pay for your taxi ride with a Bitcoin. It’s ridiculous [...] You’ve got 70% of the people in El Salvador don’t even have bank accounts,” he said.
On Friday, JPMorgan echoed similar sentiments but in more measured language, with the firm stating in a client note that it was difficult to see any “tangible economic benefits associated with adopting Bitcoin as a second form of legal tender, and it may imperil negotiations with the IMF.”
The multinational bank also revealed that it will be forming a technical advisory group to aid El Salvador in its transition to using Bitcoin as legal tender.
Hanke speculated that “dark forces are clearly behind this” in El Salvador, who want to use Bitcoin to get their hands on U.S. dollars.
The economist also described remittances across borders in Bitcoin as “nonsensical,” as he thinks the asset will need to be converted instantly to dollars to be able to use it.
“If grandma is down in El Salvador is waiting for her remittances and you want to send Bitcoin like that, it’s fine, but what does she do? She has to go to the ATM to get dollars because that’s the only way you can buy something,” Hanke said. However, businesses in El Salvador will be mandated to accept Bitcoin.
An article in Foreign Policy by trenchant Bitcoin critic David Gerard, author of the book Attack of the 50 Foot Blockchain, speculated that as El Salvador can’t print U.S. dollars, its adoption of BTC may be part of a move to source U.S. dollar liquidity from its citizens to pay back foreign debts.