El Salvador takes a decisive first step towards cryptocurrency, here’s what it means for the world
In a first-of-its-kind decision, El Salvador has adopted Bitcoin as a legal tender. In early June, President Nayib Bukele announced the country’s plans to adopt Bitcoin at the Bitcoin 2021 conference in Miami. El Salvador’s congress was then quick to draft a law around the same, which was tabled and passed with 62 out of 84 votes.
The decision has now been officially put in place. To this effect, El Salvador has bought US$27 million worth of Bitcoin (550 BTC). While Bitcoin will be accepted as legal tender (merchants will have to accept it as payment), the US dollar will remain the national currency for accounting purposes.
The Bitcoin law states that “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”. However, businesses that do not have the technological implements to accept Bitcoin, will be exempt from the law.
The country’s officials have also announced that people holding Bitcoin assets and seeing profits from such holdings will be exempt from taxation. “This (is done) obviously to encourage foreign investment,” says President Bukele’s legal advisor Javier Argueta. He added that the country will be implementing measures to deter money laundering.
There is hope for this experiment in Bitcoin adoption because it comes after the somewhat successful launch of the Bitcoin Beach in El Zonte, El Salvador in early 2019. The beach is a Bitcoin ecosystem where over 50 establishments accept the cryptocurrency as payment for their services. Bitcoin Beach’s director Mike Peterson, says that the Bitcoin Beach project was always aimed at demonstrating “the power of Bitcoin to uplift the poor and those who have been locked out of the traditional financial system.”
Let’s take a look at why El Salvador is adopting Bitcoin, how it plans to implement this decision and what the international impact of this decision has looked like so far.
Towards the adoption of Bitcoin
Here are the measures that the country has been taking to ensure the effective adoption of Bitcoin adoption:
Starting a Bitcoin Wallet and Bitcoin ATMs
The most important step that the country has taken to boost the adoption of Bitcoin is starting their own crypto wallet called Chivo. Chivo comes pre-loaded with Bitcoin worth US$30 for all those who register an account using their national ID number.
Chivo Bitcoin automated teller machines (ATMs) have also been installed across the country. At present, there are 200 Bitcoin ATMs in the country where the cryptocurrency can be exchanged for US dollars.
Facilitating Bitcoin Mining
El Salvador’s inclusion of Bitcoin as a legal tender has been followed by providing aid to Bitcoin mining efforts in the country. President Bukele has instructed the state-owned geothermal plant, LaGeo to develop a plan to offer Bitcoin mining facilities using energy generated from the country’s volcanoes.
“Our engineers just informed me that they dug a new well that will provide approximately 95MW of 100% clean, 0 emissions geothermal energy from our volcanos… Starting to design a full bitcoin mining hub around it,” said President Bukele on Twitter on June 9.
History of El Salvador’s economic decision-making
While the adoption of Bitcoin might be seen as a bold move, adopting a foreign currency is not a first for El Salvador. The country took similar steps to adopt the US dollar in 2001. After a period of internal crisis from 1980 to 1992, many Salvadorans migrated to the United States, which built extensive ties between the two countries based on trade and remittance. It was these factors that motivated the country to adopt the US dollar as a replacement to the Colón under the Monetary Integration Act of 2001.
This decision had a tremendously positive impact on El Salvador’s economy. The country has an average inflation rate of 2.03%, which is the lowest in Latin America. Besides remittance, the United States accounted for 60% of El Salvador’s exports by 2004.
Why is El Salvador adopting Bitcoin?
President Bukele believes that adopting Bitcoin would make it easier for Salvadorians living abroad to send money home. The country relies heavily on remittances, they make up 20% of its Gross Domestic Product (GDP). Over two million Salvadorians live abroad and send US$4 billion home each year. The use of Bitcoin will elimiate transaction fees on these remittances and save Salvadorans US$400 million a year.
Another major reason for this decision, according to President Bukele is to generate jobs and provide financial inclusion to those outside the formal economy. He said that about 70% of the country’s population lacks access to traditional financial services.
Doubts surrounding the adoption of Bitcoin
The adoption of Bitcoin has come with concerns around internet accessibility in El Salvador. To conduct Bitcoin transactions, the internet is an absolute necessity. Only 33.5% of the country’s population has access to the internet.
Another doubt surrounding how effective Bitcoin would be as legal tender comes from the tendency of developing economies to rely on informal brokers for conversion to the local currency. The conversion process requires a great deal of knowledge on Bitcoin and also leaves room for scams.
The fluctuation in Bitcoin price is another key concern. To address this, the country is guaranteeing convertibility to the US dollar. The government has created a US $150 million trust specifically for this purpose.
The impact of El Salvador’s experiment in Bitcoin
The long-term impact of El Salvador’s decision is difficult to ascertain at present. So far, the only thing to be said is that the decision has increased global interest in Bitcoin for now. It was speculated that the 6% rise in Bitcoin’s value was correlated to the decision which was first announced in June.
However, now that the decision has finally been implemented, the country has had several speed bumps to deal with. Bitcoin prices first fell by 17% on September 7 only to bounce back slightly by September 8..
Another challenge facing El Salvador is a massive protest from citizens who do not trust the government’s move to adopt Bitcoin. More than a thousand protestors gathered outside the country’s supreme court in San Salvador on September 7, burning tires and setting off firecrackers to show their opposition to the adoption of Bitcoin.
The decision has also opened up conversations surrounding what Bitcoin adoption on a large scale would look like. An important consideration in the matter is a need for evolution in tax policies and laws around cryptocurrency. With one country accepting Bitcoin as legal tender and another not doing the same, this could emerge as a space for tax evasion. Thus, to avoid crypto-specific tax havens and money laundering, policymakers across the world need to come together to discuss the taxation policy around cryptocurrency.
The adoption of Bitcoin might end up becoming a trend, particularly in Latin America. This is evident by the fact that this month, Panamanian congressman, Gabriel Silva aims to table a bill to make Bitcoin a legal tender in the country.
While there are a lot of concerns surrounding Bitcoin, how El Salvador will navigate cryptocurrency is yet to be seen. The country’s acceptance of Bitcoin as legal tender will act as a case study for analysts to understand the impact of cryptocurrency on an economy.
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