El Salvador Made Bitcoin Legal Tender. What Does That Mean?
On June 5, the president of El Salvador, Nayib Bukele, appeared on video at the Bitcoin 2021 conference in Miami. “Next week, I will send to Congress a bill that will make Bitcoin a legal tender in El Salvador,” he said. “In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy.” His next sentence, about the medium- and long-term effects, was drowned out by cheering from the audience. Three days later, the bill passed, making El Salvador the first country in the world to legitimize Bitcoin as legal tender. We had a few questions.
When will the law go into effect?
Ninety days after the signing of the bill, so around September 7.
What happens that day?
Bitcoin will become a legal tender. That means it can be used to pay for everything: taxes, debts, groceries. Also, there will no longer be capital gains taxes assessed on Bitcoin conversions. El Salvador has partnered with Strike, a digital wallet company, to help create the necessary payment infrastructure.
It’s kind of like Venmo for crypto. The app is built on the lightning network, a technology layered over the blockchain that allows millions of microtransactions to be packaged into a single block.
Will BTC be the country’s only currency?
El Salvador’s current currency, the U.S. dollar, will remain. In fact, the law stipulates that U.S. dollars will still be the nation’s reference currency.
Does everyone have to accept BTC?
Yes, although the law has a provision protecting people who lack the necessary technology to accept Bitcoin. To limit the number of people that stipulation applies to, El Salvador committed to providing training and equipment to encourage access and adoption.
How will this help Salvadorans?
According to President Bukele, 70 percent of Salvadorans do not have bank accounts. With the Strike partnership, banking becomes as simple as downloading an app. This law, Bukele says, will provide access to world financial markets to every citizen, empowering them to change their lives without leaving the country.
What about people who have family in El Salvador but live abroad. Will it change anything for them?
Right now, nearly 20 percent of El Salvador’s GDP comes from payments sent home by relatives working in other countries. These payments have traditionally been subject to transaction fees charged by financial institutions—sometimes enormous ones. But if people used Bitcoin for transfers instead, those transaction fees would be lower, and more money would make its way into El Salvador.
Will it drive investment in the country?
It could, and Bukele certainly hopes it will. Even a small amount of investment could have an enormous impact on the country’s wealth. For a country with a GDP of just $27 billion and a largely agrarian economy, embracing emerging technology could help attract new talent, investment, and innovation.
Bukele boasted on Twitter that the country’s unique combination of great weather, world-class surfing, no property or capital gains taxes, and the granting of immediate permanent residence for crypto entrepreneurs would cause people to pack up and move there. It’s similar to the mindset adopted by the mayor of Miami, Francis Suarez, who has been trying to make his city a world hub for crypto through similar proposals, including paying city workers in Bitcoin and accepting the currency for tax payments.
Does this have anything to do with inflation?
Yes. Dollar-dependent economies such as El Salvador’s can be hamstrung by decisions made at the level of central banks, over which they have no control. In fact, when Strike founder Jack Mallers introduced Bukele at the Miami conference, he claimed that central bank decisions—including large-scale money printing—can harm El Salvador’s economic stability. Adopting an independent currency such as Bitcoin mitigates that risk.
Is this good for Bitcoin?
Very. Becoming a foreign currency rather than a taxable asset could lead to better integration into the global banking system, higher incentive for corporations to park their funds in Bitcoin, and a stronger claim to being the future of money. That’s not to mention the 10 million new investors the market stands to gain if all Salvadorans and their families adopt the technology.
But is it real?
Some critics worry that Bukele’s announcement is a stunt intended to distract from his antidemocratic governing style. Earlier this year, his party’s supermajority pushed out the attorney general and justices of the constitutional chamber of the Supreme Court who had been critical of his policies, a move that the Biden administration finds concerning and possibly indicative of a slide toward authoritarianism. Bukele, who is a media-savvy (elder) millennial, may be capitalizing on Bitcoin’s publicity value to boost his image among his supporters as a future-minded leader.
It is also possible that widespread adoption of Bitcoin could expose new Salvadoran investors to extreme market volatility for which they are not prepared. Rohan Grey, an expert with the Digital Currency Global Initiative, told BBC World that authorizing Bitcoin as a legal currency would cede control of El Salvador’s economy to “a network that … doesn’t have a track record of providing the kind of price stability and liquidity that a currency is supposed to provide.”
Is this part of a trend?
Sure seems to be. Latin America has thus far seen impressive benefits from the adoption of decentralized currencies. In Argentina, for example, inexpensive electricity, high inflation, and caps on currency conversions have led to a boom in cryptocurrency mining (and resulting profits). In Mexico, volume on the leading crypto exchange Bitso increased by 342 percent in just eight months, in part in response to banking restrictions intended to crack down on crime that have also trampled ordinary investors. In Cuba, use of Bitcoin has allowed citizens to override U.S. sanctions and trade embargos that have depressed local financial markets since the 1960s.