El Salvador became the first country to make bitcoin its legal tender
In the days and weeks following El Salvador’s bombshell announcement that it would make Bitcoin legal tender, more policymakers have come out in favour of the move, sparking intense debate about whether more countries could follow the same trend.
President Nayib Bukele made the announcement on June 5 2021 in a pre-recorded video played on stage at the Miami Bitcoin 2021 conference. You can imagine the response from the Bitcoin maximalists in the audience. Four days later, Bukele’s proposal passed through his country’s legislative system to become law.
Legal experts of all stripes have been weighing in on the issues now facing the Central American country.
Bitcoin becomes an official currency alongside US dollars in El Salvador. As legal tender, Bitcoin will be subject to zero capital gains tax.
Article 7 of the law states: “Every economic agent must accept bitcoin as a form of payment when it is offered by whoever acquires a good or service.” (translated from Spanish).
The law requires the government to provide “the necessary training and mechanisms” for people to access transactions using Bitcoin. Bukele announced via Twitter on 11 June 2021 that he had instructed the state-run geothermal power facility to start mining Bitcoin.
Local journalists have also pointed out that according to the World Bank’s Articles of Association, the international financial institution is now obliged to accept payments in Bitcoin from El Salvador, because it has been adopted as legal tender.
El Salvador is not a rich country by any metric, lying 106th out of 195 countries rated by the International Monetary Fund. Its total GDP is at $26.2bn as per 2021 IMF estimates, flanked by the likes of Cyprus, Zimbabwe and Yemen.
It is Central America’s smallest country, with a population of only 6 million. And it does not have its own currency. In 2001, Fransisco Flores Perez, El Salvador’s corruption-tainted president from 1999-2004, replaced the colón (national currency since 1892) with the US dollar.
That makes El Salvador intensely reliant on the US government and on US dollars for remittances and inward investment. Breaking that chain could give the country more independence from the world’s largest reserve currency. And remittances — where migrant workers abroad send small amounts of money back to their home country — are incredibly expensive in this corner of the world.
By the World Bank’s own estimates, banks take a fee of more than 10.5% per transaction, leaving most people to rely on informal brokers without standard protections against losses. “In many smaller remittance corridors, costs continue to be exorbitant,” the World Bank’s May 2021 report says. Using Bitcoin instead would mean more of a family’s money would go directly to their personal wallet, without incurring insane fees for middlemen, and could enrich the estimated 30% of people living in poverty across the country.
The ability to legally transact in Bitcoin should attract digital asset startups to register — and pay taxes — in El Salvador, boosting in the country’s private sector.
Bukele’s decision has not been met with support in all areas.
El Salvador officially requested help from the World Bank to design a framework to correctly implement the use of Bitcoin, a request rejected by the intergovernmental agency, who cited Bitcoin’s environmental and transparency issues.
In a recent survey by the country’s Chamber of Commerce and Industry, nearly half of all small business owners are concerned about bitcoin becoming legal currency, and over 96% would prefer that its use is optional, rather than mandatory. Political opponents of Nayib Bukele have put forward a bill in recent days to reform Bitcoin’s use as legal tender, and stressed that the obligation to use the digital currency is a violation of citizen’s right.
In recent years Bitcoin has been used more as an alternative asset, inflation hedge and store of value than the original intention stated in its 2008 whitepaper: as a “purely peer to peer version of electronic cash”. Enduring price volatility and worldwide retail speculation over the value of BTC against major world currencies has made Bitcoin tricky to use as a day-to-day means of exchange. One month, a bitcoin is worth $40,000. The next, it may only be worth $35,000, or $45,000. Giving up bitcoin (or more likely, small fractions of a bitcoin in the form of satoshis) in exchange for goods and services today seems unpalatable when it may be worth more in the future. One analogy would be that it is like using gold to pay for bread, or cinema tickets.
For now, we’ll set aside claims that El Salvador will become an attractive jurisdiction for money laundering. Chainalysis reports that crypto-related crime fell sharply in 2020 to under $10bn of transaction volume, and that 0.34% of all cryptocurrency activity in 2020 was crime related.
However, it is worth focusing on how bitcoin will be used alongside US dollars.
For example, Finance Minister Alejandro Zelaya has since clarified in public comments that wages would still be paid in US dollar, because company accounting remains in the fiat currency.
Economist and public debt specialist Daniel Munevar, once advisor to the Columbian Finance Ministry, is one of the legal specialists tracking the El Salvador issue in detail.
“As prices and goods remain denominated in USD their tolerance for BTC volatility is minimal. As soon as they get BTC they will likely exchange it for USD through the [government-run] public facility.
“Businesses are in a similar position. Their credits, supplier bills (including import) and taxes will remain denominated in USD. Sure they can pay those in BTC, but why take the risk of high intraday volatility that can mess up their capacity to settle bills at the end of the month?
“Why would they do that? You can’t settle imports nor meet debt payments with BTC. For that you need USD. The only scenario where SLV would want to structurally accumulate BTC is if they are convinced the price will always go up in the long run….[The] government seem to assume they can handle the short term volatility and profit from a neverending long-term appreciation of BTC vs USD. Risky play…”
These are strong points which need discussion and debate to solve. Certainly it appears likely that there will be get-out clauses for businesses who don’t want to transact in BTC and that the law will be amended as the scale of the challenge of integrating Bitcoin into the legal and economic fabric of the country becomes clearer.
In the wake of Nayib Bukele’s announcement, several South American policymakers showed immediate support for using Bitcoin in their own countries. Breaking the monopoly of the US dollar in the United States’ neighbours to the south is seen as critical for promoting those countries’ self reliance.
Paraguayan politician Carlos Rejala announced that he plans to introduce a similar bill in July 2021 to make the country a more attractive destination for new crypto businesses.
“As I was saying a long time ago, our country needs to advance hand in hand with the new generation,” he tweeted.
Policymakers in the economic powerhouses of Brazil and Argentina have also voiced support for El Salvador’s decision.
As a critical shipping destination into South America, Panama seems most likely to follow El Salvador’s lead. Congressman Gabriel Silva tweeted in the aftermath of Bukele’s announcement that he was preparing to present a proposal for the country’s national assembly: “This is important, and Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies.”
Tanzania’s President Samia Suluhu Hassan also addressed her central bank finance ministers in widely-repored remarks, asking them to prepare for the possibility of adopting crypto as legal tender.
The serious conversations ongoing today make it clear that the world sees Bitcoin in a new light. As a purely peer to peer form of electronic cash, Bitcoin’s original purpose is now being tested in the wild. And as much as skeptics would like to see them banned or outlawed, cryptocurrencies and digital assets are not going away. If anything, the revolutionary technology is becoming ever more closely intertwined with banking and state monetary policy. So what do we expect from the future? For more countries to follow El Salvador’s groundbreaking lead.