El Salvador is the first country in the world to make Bitcoin legal. Will this be the answer to the nation’s financial woes? Or will it be a match made in hell? Let’s find out more!
The Beginnings of a Financial Romance
Unless you’ve been living under a rock for the last while, you must have heard that El Salvador recently passed a bill to make Bitcoin legal tender. In fact, the bill was passed by a large majority, gaining 62 out of 84 possible votes within Congress. Under the new law, which will be implemented in September 2021, Bitcoin must be accepted by firms when offered as payment for goods and services. Tax contributions can also be paid in cryptocurrency.
However, El Salvador is not getting rid of the US Dollar all together. El Salvador’s President Nayib Bukele stated:
‘The use of Bitcoin will be optional, nobody will receive Bitcoin if they don’t want it. If someone receives a payment in Bitcoin, they can choose to automatically receive it in Dollars’
El Salvador is the first country in the world to make Bitcoin legit. You might be wondering why this is such a big deal for El Salvador as well as several other Central and Latin American countries. Let me explain by first giving you some history on the nation that is El Salvador.
This small Central American country’s past is a troubled one. It has endured political and economic instability with a series of coups, revolts, and a succession of authoritarian rulers. Persistent socioeconomic inequality and civil unrest led to the Salvadoran Civil War which took place between 1979 and 1992. Due to this constant state of conflict, El Salvador has been ravaged by poverty and gang-related criminality.
Traditionally, El Salvador relied heavily on coffee exports for revenue. However, they later looked to diversify their international exports and the economy by opening up trade and financial links as well as expanding their manufacturing sector. To facilitate trade and attract foreign investment, El Salvador dropped its own currency, the Colon, in 2001 and adopted the US Dollar.
So what has all of this got to do with Bitcoin? Well, simply put, adopting the US Dollar didn’t solve El Salvador’s financial problems. The foreign trade that was promised, the high-quality jobs, the foreign investment, the increase in exports…all of this didn’t come to pass. So how does El Salvador keep its financial head above water?
Foreign remittances is the answer. In 2019, foreign remittances amounted to the equivalent of 16% of the country’s GDP. Many Salvadorans migrate to the United States to find work so they can send money home to their families, and foreign remittances allow them to accomplish this.
Naturally, this is where Bitcoin comes in. Now as many of you know, sending money through the traditional banking system is slow and expensive, because everyone wants a slice of the pie. Moreover, opening a bank account requires legal documents, like a passport. This is a major issue in developing countries where accessing official documents is typically expensive, time-consuming and complicated.
Bank accounts…now that’s another problem! According to President Bukele:
‘Some 70% of people in El Salvador lack access to traditional financial services.’
So, with such a large percentage of the population unbanked, Bitcoin could solve a lot of problems by getting money from abroad, quickly and far more affordably.
Not Quite a Fairytale?
Many arguments have been put forward criticizing El Salvador’s decision to make Bitcoin legal tender. The IMF and World Bank have outright refused to assist with the roll-out. The World Bank cited that they had problems with the transparency of Bitcoin transactions and the environmental impact of Bitcoin mining.
Excuse me? Did they not hear President Bukele say that El Savador will mine Bitcoin using geothermal power from the country’s volcanoes?
More on that in a follow-up article. Stay tuned!
One common argument is that using Bitcoin is too difficult and risky for the average person. To address this issue, President Bukele has committed to offering training to people and initiatives promoting the use of Bitcoin.
He is also launching an e-wallet called Chivo, which is Salvadoran slang for ‘cool.’ As part of the package, people who make use of it will receive $30 in Bitcoin so that adoption is incentivized.
Athena Bitcoin announced plans to install 1,500 Bitcoin ATMs in El Salvador, targeting places where residents receive remittances from abroad. This should make it easier for people to buy and sell Bitcoin.
President Bukele was asked whether the use of Bitcoin would encourage criminal activity and money laundering. This is a common argument often used by opponents of crypto and Blockchain. He replied that criminals are already using the Dollar…
‘The problem is not the Dollar, it is the criminals.’*
Another argument is that Bitcoin is highly volatile, which makes it risky. However, with rampant inflation across many Central and Latin American countries, the volatility of Bitcoin doesn’t hold a candle to the levels of inflation these nations have endured. For example, Argentina is battling an unsustainable debt load while Venezuela’s economy has shrunk by 75% since 2013. Nice job fiat currencies!
Dissenters have often said that Bitcoin transactions are slow and expensive. Slow? I’m not so sure about that. I’ve personally had to wait longer than 10 days for money to arrive in my bank account from abroad. In my opinion, Bitcoin is definitely the hare while banks are more like the old arthritic tortoise…
Also, don’t forget Jack Mallers’ Strike app and the Lightning Network. The Strike app makes it fast and cheap to send and receive small amounts of Bitcoin. This is because Strike is powered by the Lightning Network, a layer 2 protocol that settles transactions ‘off-chain’ through a growing network of user-hosted channels and nodes. In fact, the Strike app has quickly become the most popular one in El Salvador.
Expensive? Start looking at organizations like Western Union and MoneyGram…the fee system is mind-boggling! Fees differ depending on where you’re sending your money, whether you’re using a bank transfer or a credit card, or even whether your recipient is receiving the money as cash or into a bank account. Also, one time a relative sent me some money via Western Union, I had to show my passport to prove my identity. So as it stands, the use of personal documentation is necessary to transact in the legacy financial system.
Making It Together
Whether other Central and Latin American countries follow El Salvador’s lead and make Bitcoin legal tender remains to be seen. The reaction of the IMF and The World Bank is certainly something to take into account. Do they really believe Bitcoin is too risky and simply don’t want to be associated with it? Or do they see Bitcoin as a threat to the financial status quo and therefore their power and influence? Hmmm…
In my opinion, anything that shakes up the traditional financial system is only a good thing. Whatever happens, you can be sure that I’ll be bringing you all the latest updates on El Salvador and Bitcoin as they occur. Until next time!