It’s been almost two months since El Salvador became the first nation to approve Bitcoin as legal tender on June 9th 2021. El Salvador’s main currency, the U.S. dollar, will run parallel to Bitcoin (BTC) starting September 7th, 2021 which is just about a month away.
El Salvador president Nayib Bukele, emphasized that the U.S. dollar and Bitcoin would operate side-by-side. The country has gone as far as promising $30 in Bitcoin to each El Salvadorian citizen that downloads and registers on the country’s new Bitcoin wallet: “Chivo”.
So why is El Salvador doing this? Why does it matter?
Below is an analysis of some of the challenges and obstacles El Salvador faces trying to execute on its vision of being the first country to adopt and implement Bitcoin as legal tender and what it may mean for the rest of Latin America if they succeed.
What is the purpose of the law?
The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.
Why is El Salvador adopting Bitcoin as legal tender?
Look no further than the Decree itself:
- Promote and protect private enterprise and increase national wealth
- 70% of the population doesn’t have access to traditional financial services.
- Obligation of the State to facilitate financial inclusion
- Promote economic growth
- Issue basic rules that regulate legal course of Bitcoin
What does it mean in layman terms?
You can pay your taxes in Bitcoin.
Every economic agent must accept Bitcoin for goods or services unless otherwise exempt.
Prices may be expressed in bitcoin.
Bitcoin exchanges will not be subject to capital gains taxes.
The legislation established a government fund that will guarantee the automatic convertibility to US dollars.
Is there support for Bitcoin adoption in El Salvador?
President Bukele’s plan is ambitious and has never been done before. Luckily, he is not alone in his journey. El Salvador’s legislative assembly passed the legislation a few days after it was first announced at the Bitcoin 2021 conference in Miami.
There was also support offered by the Central American Bank of Economic Integration (CABEI). The CABEI Executive President Dante Mossi has expressed his support. “We’re very optimistic,” he said. The bank will give El Salvador technical assistance to implement bitcoin as legal tender. This shows that the bank is focusing on its vision of promoting economic integration and the balanced economic and social development of the Central American region.
Additionally, Bukele is trying to attract more Bitcoin talent and expertise to El Salvador. He said that anyone who invests three Bitcoin in El Salvador-currently about $120,000- will be entitled to permanent residency. He has consulted with firms and experts such as Jack Mallers from Strike Wallet about how to make Bitcoin legal tender a reality. Jack went on a series of trips to El Salvador to help empower the Bitcoin Beach community, and later helped Bukele announce the forthcoming law at the Bitcoin 2021 event. Strike’s expertise especially in remittances through the lightning network will be very important since 24% of the country’s GDP is based on remittances.
If you want to hear more about the story behind how El Salvador went down the road of adopting Bitcoin, there are two great podcasts from Peter McCormack which detail the story in-depth from both Jack Mallers and President Bukele.
I highly recommend listening to both What Bitcoin Did podcast episodes:
A Boost to the Bitcoin ATM Industry
The Bitcoin ATM industry in El Salvador can also benefit from this legislation. The Bitcoin Law will make it easier for Bitcoin ATM operators to set up shop in the country. A number of different Bitcoin ATM firms have expressed their desire to invest in infrastructure, installing thousands of Bitcoin ATMs in El Salvador.
Central American nations usually receive a lot of remittances from abroad and with the adoption of Bitcoin as legal tender, residents can receive BTC from their friends and family abroad and sell them at the ATMs for cash. Bitcoin ATMs will be essential infrastructure for ensuring a successful implementation of Bitcoin as legal tender in the country.
What are the benefits of adopting Bitcoin as legal tender?
If you’re President Bukele, he supposedly has his sights set on de-dollarization even though he made sure to emphasize that bitcoin and the US dollar would operate with one another side-by-side. El Salvador uses the dollar which has some drawbacks as of late. With unprecedented expansion of the money supply from stimulus during lock down and with no end in sight, El Salvador citizens are penalized by saving in dollars and have no direct benefit from the stimulus itself.
The citizens arguably benefit from potentially lower-cost remittances and a persistent savings account immune from money supply expansion and hyper inflation. Bitcoin adoption in El Salvador can have meaningful societal benefit in an environment where a large segment of the population is unbanked and lacks access to basic financial services. “However, with the advent of the lightning network it has become more feasible to use bitcoin as a method of payment.
More than two million citizens live outside the country, but continue to keep close ties, sending billions of dollars back home. Bitcoin can make this much more efficient and lower friction.
What are some of the risks and obstacles that El Salvador faces?
El Salvador is a relatively small nation that depends on the support of outside nations and international organizations. They might have an uphill task gathering international support.
Finance Minister Alejandro Zelaya said that they reached out to the IMF and World bank requesting support for their implementation of Bitcoin. The World Bank said it could not assist El Salvador’s bitcoin implementation given environmental and transparency drawbacks. The IMF also said it saw “macroeconomic, financial and legal issues” with El Salvador’s adoption of Bitcoin.
Opposition lawmaker Rodrigo Avila of the conservative Arena party complained that the legislation was not sufficiently discussed by the Legislative Assembly before passage. There was no testimony from economic or cybercrime experts.
Education is also a large hurdle to overcome. Bitcoin is new and there is a slight learning curve. The government said it will promote training for people to be able to carry out transactions using Bitcoin. Education will be paramount to adoption throughout the country. The government has a lot of work to do to make sure there are easy to use tools and services for citizens.
Ripple Effects throughout Latin American and Caribbean
Nations like Paraguay have already proposed a Bitcoin bill. While it doesn’t go as far as El Salvador, it aims at regulating ownership and registration of Bitcoin along with bitcoin mining operations. Carlitos Rejala, a congressman and the National Deputy of Paraguay, has called for his government to take similar action to El Salvador. Putting laser eyes on his profile picture, he tweeted: “As I was saying a long time ago, our country needs to advance hand in hand with the new generation. The moment has come, our moment.”
He said the law would allow crypto mining or exchange companies to finance their Paraguayan operations with digital assets as well as remit dividends abroad and capitalize their crypto profits in domestic banks.
Gabriel Silva, Member of Parliament in Panama, tweeted congratulating El Salvador when the bitcoin law was approved. “Good news for El Salvador who is teaching the government of Panama in entrepreneurship and technology. We have to think beyond the canal and free zones, betting on the knowledge economy, quality education for all and facilitating new businesses.” The congressman stated that he is working on a proposal to present to Congress. His approach is promising since he even put out an open invitation to collaborators.
Fábio Ostermann, an elected member of the Legislative Assembly in Rio Grande do Sul, Brazil, put laser eyes on his profile picture to signal his support for Bitcoin.
Argentina’s National Deputy Francisco Sánchez also temporarily put laser eyes on his profile picture to signal his support to Bitcoin twitter.
Mexico has shown support of the move through its legislators and business people hinting on pushing for cryptocurrency adoption. Eduardo Murat Hinojosa talked of proposing to Mexico’s lower house a framework for cryptocurrencies.
In the business sector, Ricardo Salinas Pliego, the nation’s third richest person hinted that his bank, Banco Azteca, would accept Bitcoin soon.
Other countries in the region, including Venezuela and the Bahamas, have introduced centralized digital currencies, though none had adopted the Bitcoin as legal tender just yet.
What lies ahead?
El Salvador has made international news and gathered a lot of attention. This is a big move. Many countries will be watching closely. With Bitcoin, there’s risk is being the last country to adopt. The rewards begin to diminish the longer you wait. Underdog countries may look to take steps early to give them an advantage against other larger economies.
This looks like it could be more than just a trend. Other countries will eventually learn that Bitcoin can significantly increase national wealth. Some will even hold it in their national treasury reserves. It’s a geopolitical 800-pound elephant in the room.
The world is now watching. El Salvador made the first move. “We build our own future. So why do we have to resign ourselves to a dystopian future?” said President Bukele. “This will be a huge game changer not for El Salvador but for the world. It’s beautiful to be part of a huge change in humanity.”