El Salvador's 'stupid' decision to adopt bitcoin as legal tender could collapse the economy, economist Steve Hanke said

• El Salvador's approval of bitcoin as legal tender could lead to an economic downturn, Steve Hanke predicted.
• The economist described members of government who passed the bitcoin law as "stupid".
• He predicted bitcoin holders in Russia or China would target El Salvador to cash out their holdings.

El Salvador's move to classify bitcoin as legal currency has the potential to completely collapse its economy, Steve Hanke, professor of applied economics at Johns Hopkins University, said in a Kitco News interview on Tuesday.

After describing President Nayib Bukele and members of government who voted to pass the bitcoin law as "stupid," Hanke raised doubts about whether the cryptocurrency could work smoothly for everyday use in a country where most citizens don't have bank accounts.

The economist, who served on former President Ronald Reagan's council of economic advisers in the 1980s, suggested criminal interests may have helped bring about the Latin American nation's adoption of cryptocurrency.

"The criminal element wants to be able to get in and actually obtain real legal greenbacks," he said. "They want greenbacks. And greenbacks are, in fact, the legal tender and money in El Salvador."

Hanke predicted bitcoin holders in Russia or China would exploit El Salvador's citizens to cash out their holdings, ultimately draining the country of US dollars.

"It has the potential to completely collapse the economy, because all the dollars in El Salvador could be vacuumed up and there'll be no money in the country," he said. "They don't have a domestic currency."

Governments and central banks around the world will be watching El Salvador's experiment to see whether bitcoin becomes part of daily life for payments and remittances.

But Hanke called the idea crazy, saying the digital asset will need to be converted to US dollars to be used anywhere. "You're not going to pay for your taxi ride with a bitcoin, it's ridiculous," he said.

"If grandma is down in El Salvador waiting for her remittances, and you want to send it with bitcoin, that's fine. 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.

But the bitcoin bill mandates every business to accept the cryptocurrency as legal tender, unless it doesn't have the technology to enable such a transaction. Further, the government is considering whether companies should pay salaries in bitcoin.

JPMorgan said last week that it was difficult to see any benefits of adopting bitcoin as a second form of legal tender, and the move could risk relations with the International Monetary Fund.

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