Only a few hours ago, El Salvador formally recognized Bitcoin as legal tender, thus becoming the first country in the world to do so. Adopting Bitcoin as legal tender means that the digital currency has the same legal status as traditional (fiat) currency and can be used to make all sorts of purchases in the Central American country.
This article means to inform you about the newly passed legislation known as ‘Bitcoin Law’ and how El Salvador is attempting to make itself desirable to cryptocurrency investors and enthusiasts.
Bitcoin Law
On 8 June 2021, the Congress in El Salvador passed the ‘Bitcoin Law’, which changed the status of the cryptocurrency to legal tender, thus making Bitcoin equal to fiat currency in the eyes of the law. The ‘Bitcoin Law’ was passed with a supermajority (62 out of 84 votes), which shows how popular the proposal is with Salvadoran lawmakers. The opposition parties voted against the measure.
Despite Bitcoin gaining popularity and respect around the world, the digital currency had not been recognized as legal tender by any country until today. Although it’s legal to operate with Bitcoins in many countries, the cryptocurrency is still not viewed as legal tender by any governments besides the Salvadoran.
New Administration – New Economic Philosophy
El Salvador leads the global cryptocurrency efforts as the country is branding itself as a Bitcoin haven. The young and ambitious president, Nayib Bukele, is the mastermind behind this new economic plan. Ever since Bukele was inaugurated (June 2019), he’s been pushing for this Bitcoin reform. Bukele says that if El Salvador offers investors an opportunity to freely operate with Bitcoin, the GDP will consequently increase. The president gave an example by saying that if only 1% of all Bitcoins are invested in El Salvador, the country’s GDP would see a 25% increase.
Some supporters of the measure claim that Bitcoin reserves can also act as a safety net that protects developing economies from unpredicted levels of inflation. It’s not a coincidence that Venezuela, a country that continues to struggle with hyperinflation, has lately turned to cryptocurrencies in a bid to restore its economy.
It should be noted that El Salvador relies heavily on cash in its economy, which explains the fears of inflation. Nearly 70% of Salvadorans use cash and don’t have bank accounts or credit cards. The cash-based economy, using the US dollar as official currency, comes with problems related to the money sent to the country from Salvadorans living abroad (approximately ¼ of all Salvadorans live outside El Salvador), which accounts for 20% of El Salvador’s GDP. The transactions take time to process, sometimes require physical pick-up, and are bound by fees, while Bitcoin shares none of these problems. The digital currency is also not backed by assets but by its popularity and scarcity (cap of 21 million BTC in existence). In order to make the Internet better and more accessible, thus also easier to operate with Bitcoins, El Salvador is planning to build satellite infrastructure. El Salvador is also working closely with various Bitcoin leaders such as Strike, which can see Bitcoin become the backbone of the Salvadoran economy and serve as an example of a contemporary financial ecosystem to other countries.
The Opportunities in Store
In the weeks preceding the vote on the ‘Bitcoin law’, Salvadoran officials have been promoting not only the law, but a whole new lifestyle that the law can provide to crypto investors.
Two days before the law passed, Bukele shared a tweet in which he praised his country and showed the world the opportunities it offers. Bukele is very active on Twitter, which is his preferred way of communicating with his electorate and possibly future electorate. We use the phrase ‘future electorate’ because Bukele promised immediate permanent residence to crypto entrepreneurs who move to El Salvador. He made the offer even more lucrative by reminding potential emigres of El Salvador’s beautiful nature, warm climate, and most importantly, the lack of property tax and the abundance of beachfront properties for sale. El Salvador is one of the few countries in the world with no property tax, which already made it a desired spot for foreigners purchasing vacation properties. It’ll be interesting to follow this situation to see if Bukele’s new policies indeed attract people who not only invest in El Salvador’s crypto market but who also move there permanently.
In terms of Bitcoin usage, Bukele said that Bitcoin’s status as legal tender means there will be no capital gains tax for it as it is a legal currency. It’s more than likely for companies on the cryptocurrency market to begin opening offices in El Salvador considering this new policy. They may also be followed by big companies, which are currently attempting to introduce Bitcoin as a means of payment. Lastly, Bukele hopes that Bitcoin will soon become the desired method of transactions by Salvadorans who live abroad and send approximately $6 billion annually back home.
In terms of foreign economic policy, Bitcoin can also grant El Salvador more economic independence. The country’s official currency is the US dollar, which is, obviously, intrinsically tied to US economic policies, as well as international finance. If El Salvador manages to replace the dollar with Bitcoin as its main currency, it will not only gain independence from the US economy but also from the global economy and fiat currency in general.
Conclusion
Whether the country succeeds in its new ambitious plan or not is very early to say, but Salvadorans appear to be satisfied with the new legislation. Since this measure is the first of its kind, it’s difficult to foresee how a Bitcoin-based economy would work in practice. Despite the overall positive responses from all over the world, there are also many warnings from more conservative economists who say that Bitcoin’s high volatility throughout the years should be taken into account before El Salvador implements more radical economic policies. We’ll follow and inform you of any future crypto developments in El Salvador.
