In September of 2021, a tiny country in Central America created history and sent ripples in the global financial system when its legislative assembly voted to make Bitcoin the country’s legal tender, making the world’s largest cryptocurrency a legally accepted means of exchange for services and goods. El Salvador could provide an interesting case study about Bitcoin as legal tender and how it could be implemented, enabling other countries, such as the Central African Republic, to follow suit.
In this guide, we will take a closer look at the decision to make Bitcoin legal tender, the reasoning behind it, and how it could benefit both El Salvador and Bitcoin.
Before we move any further, we have to understand the definition of “legal tender.” Legal tender is any form of payment that a government accepts as settlement for taxes, public charges, or any other business dues. The definition of the term “legal tender” in the US applies to currency issued by the Federal Reserve. However, no seller is bound to accept cash Dollars in payment. Back in 2001, El Salvador abandoned its currency, switching to the US Dollar, and has now added Bitcoin as well.
So the obvious question becomes, why is El Salvador embracing Bitcoin as legal tender? There are three primary reasons behind the switch.
El Salvador’s economy is heavily dependent on international remittances. In fact, over 20% of the country’s GDP comes from remittances, according to data from the world bank, with a significant chunk of the population dependent on these remittances. However, remittances are a costly affair, and the cost of a transfer from the US to El Salvador is between 30%-50% of the value of the transfer.
70% of the population in El Salvador does not have access to a bank account. El Salvador made the switch to Bitcoin to give their population easier access to their funds and financial services without requiring a bank account.
One of the primary goals of El Salvador’s pivot to Bitcoin is to reduce the country’s reliance on the US Dollar and embrace Bitcoin as a neutral store of value and medium of exchange.
The law sees Bitcoin become legal tender for taxes, public debt, and private debt. There will also be no capital gains tax, and everyone must accept Bitcoin unless they do not have access to the technology. The government will also promote a free and optional bitcoin wallet called the Chivo wallet.
President Nayib Bukele hopes that the adoption of Bitcoin as legal tender will provide the country with investment incentives and job opportunities. As an investment incentive, the government is offering any individual who invests 3 BTC
into the country permanent residency without any capital gains tax.
We have already mentioned earlier that 70% of the population of El Salvador is unbanked, a figure that is far higher than the global average of 22%. Adopting Bitcoin as legal tender will give Salvadorans access to a financial system with limited bureaucracy involved. It could also boost P2P financial infrastructure in the country, significantly boosting financial inclusion.
El Salvador’s move could have implications for the country and the cryptocurrency. While the International Monetary Fund (IMF) and the World Bank stated that El Salvador’s decision to adopt Bitcoin as legal tender could present several macroeconomic and financial issues, the country has pressed ahead with its decision. The country’s pivot to Bitcoin could affect international trade. The country’s largest trading partner is the United States, and the use of the Dollar has played a crucial role in easing trade between the two. It remains to be seen if the US would accept Bitcoin as a form of settlement. It also remains to be seen if the move would have an impact on El Salvador’s currency reserves.
The use of Bitcoin as legal tender in a sovereign country could have far-reaching consequences for the cryptocurrency as well, strongly influencing Bitcoin’s future by demonstrating its capability as a medium of exchange, thanks to the use of the Lightning Network, which El Salvador also plans to implement for faster transactions. However, there are some risks that would need to be addressed, such as,
El Salvador’s move to adopt Bitcoin as legal tender is an excellent opportunity to study how the cryptocurrency can be utilized in tandem with the nation’s currency (in this case, the US Dollar). It would be interesting to see how the central bank would handle legal tender on which it has little authority and could potentially provide other potential adopters a reference on how to deploy Bitcoin as legal tender.
The cryptocurrency’s use in El Salvador could also provide an insight into its applications beyond a store of value, becoming the first example of potentially many of how a sovereign nation could implement Bitcoin into their daily lives as legal tender.
The success of El Salvador’s move could result in a domino effect, spurring other countries to adopt Bitcoin as legal tender as well. Several countries suffer from the same issues that prompted El Salvador to adopt Bitcoin, and they could use this as an excellent opportunity to study El Salvador’s success and implement it. In fact, many countries have actively been exploring the same. One country, the Central African Republic, became the first country in Africa to make Bitcoin its official currency. The stated goal behind the move, according to President Faustin Archange Touadera, is to improve the financial conditions of the nation’s citizens.
Bitcoin’s adoption as legal tender is an indication of how far the cryptocurrency has come since 2009. Whether other countries follow suit remains to be seen, but El Salvador could provide an excellent opportunity to gauge Bitcoin’s potential. A month after the legislation passed, 3 million citizens were using El Salvador’s Bitcoin wallet, almost 50% of the population. An average of $2 million per day in remittances were transacted through the Chivo wallet. The government has also been promoting Bitcoin adoption through several incentives, such as discounts on fuel if purchased using the Chivo wallet.
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