Bitcoin is to officially become a currency on par with the US dollar in El Salvador. Through partnerships, the president of the Central American country wants to quickly build a modern financial infrastructure to use Bitcoin as a network and means of payment.
At a conference in Miami, the president of El Salvador announced that he wants to make Bitcoin a legal tender. The bill he will send to Congress would promote Bitcoin to an official currency. This could make El Salvador the first country in the world to formally adopt a crypto-asset as a means of payment.
Update 09.06.2021: Congress approved the law by a supermajority of 62 to 84 votes.
Despite the country’s small size, this represents a crucial step for the international recognition of cryptocurrency. As an official currency, Bitcoin’s legal status would have to be adjusted in other countries as well – capital gains taxes, for examples, would not apply.
Unique and bold move by the country
According to President Bukele, in the short term, the implementation of Bitcoin can create jobs and help bring thousands of people into the formal economic cycle. About 70% of the South American country’s residents do not have a bank account, despite their participation in the domestic economy, he said. Financial inclusion is thus an important issue, and the adoption of Bitcoin could play an important role in El Salvador’s economic growth.
President Nayib Bukele has also said that Bitcoin will make it easier for residents to send payments abroad. More than two million Salvadorans live outside the country, but they continue to maintain close ties to their birthplace, sending back more than $4 billion each year. The announced partnership with payment service provider Strike promises easy adoption and immense fee savings.
Digitalization of payment transactions
The payment service will provide an open-source “Bitcoin For Countries” guide for the process. According to Strike CEO Jack Mallers, the adoption of Bitcoin as legal tender is a pivotal moment that can help countries like El Salvador transform from a largely cash-based economy to an innovative, inclusive and transparent digital economy. The cell phone also works as an account, especially significant in El Salvador, where a majority of residents do not have bank accounts or credit cards.
Recovering from a brutal civil war, El Salvador 🇸🇻 is now the 6th-highest ranked country in inbound remittance from the U.S, making up 24% of the nation's entire GDP.
— Documenting Bitcoin 📄 (@DocumentingBTC) June 6, 2021
Moreover, remittances account for 24% of El Salvador’s gross domestic product. Incumbent services can charge 10% or more in fees for international remittances that take days to arrive and must be picked up at a physical location. That’s hundreds of millions of dollars per year that residents could save or spend with local businesses in their communities – demonstrating the powerful use cases and addressable market opportunities from scaling Bitcoin for everyday use.
Just a presidential marketing stunt?
Rohan Grey, an expert at the Digital Currency Global Initiative, was more critical of the idea in an interview with BBC, indicating that Bukele used announcement mainly as a marketing stunt, while no specific things have even been worked out yet. He warned more generally that a country adopting a cryptocurrency as legal tender would give significant control to a network. The network would not be stable, would not have responsible actors, and could not offer a track record. It also does not offer price stability or liquidity – which is central to a currency, he said.
“Mr. Bukele is a young president trying to capitalize on a popular image. There’s great PR value in announcing something like this, even if you haven’t worked out all the details yet.” – Rohan Grey, Digital Currency Global Intiative Expert
Bukele is popular in El Salvador, according to official figures, and his populist “New Ideas” party clearly won the last elections. However, the new government recently came under fire after it fired the attorney general and chief justice. The move prompted the U.S. Agency for International Development to withdraw aid to El Salvador’s national police force and a public information institute.