Bitcoin is now legal to use in El Salvador for buying and selling. What’s next?
Are there risks to adopting Bitcoin as a legal tender? Which country will be next?
If you hold at least 3 Bitcoins, head over to El Salvador and invest it to get citizenship. The South American country is planning to use its volcanoes to flourish in the Bitcoin business. It all sounds bizarre but El Salvador made a historical leap on June 9, 2021 and opened its arms wide to Bitcoin entrepreneurs. The landmark decision intended to foster development got its neighboring countries excited but a closer look warrants reason for caution.
The leap - world’s first to accept Bitcoin as legal tender
El Salvador became the cool kid on the block last week after adopting Bitcoin as a legal tender - the first country in the world to take such a leap. El Salvador has always accepted payments in Bitcoin along with the US dollar, the prominent currency in use, and it's less popular local currency called colon. The uplift to legal tender marks that Bitcoin cannot be refused as payment for goods and services once the law comes to effect in September.
Citizens can use Bitcoin to pay taxes and use it for purchase of all kinds of goods and services from purchasing ice cream to visits to the barber. The government guarantees that if vendors wish to stick to the existing currency, the dollar, they can immediately convert their digital wares to dollars. The government plans to establish a $150 million (Dh550 million) trust with Bandesal, the development bank of El Salvador to carry out the conversions and has vouched to provide necessary training for the population to adapt to the new technology.
Bitcoin is widely criticised for its high energy consumption but El Salvador is planning to support the generation of Bitcoins with the geothermal energy from its volcanoes. El Salvador state-owned geo thermal electric firm LaGeo started construction of a Bitcoin mining plant and a well providing 95 megawatts of clean geothermal energy was dug last week, the El Salvador’s President Nayib Bukele tweeted.
President Bukele laid out the official government statement on his Twitter page and donned laser eyes in his Twitter profile picture, a move users use to proclaim their adoration for cryptocurrencies.
Soon after Bukele made the announcement, Paraguay minister Carlitos Rejala, Panama minister Gabriel Silva, Brazil minister Gilson Marques, Mexico minister Indira Kempis Martinez and a minister in Argentina changed to laser eyes on social media and vouched for the use of cryptocurrencies in their own countries. The domino effect makes it seem like Latin America is embracing Bitcoin but why are they so attracted to it?
Limited reliance on the US, the USD
Latin American countries are heavily reliant on remittances with $100 billion (Dh367 billion) sent to the region in 2019. In El Salvador, remittances account for 23 per cent of the country’s gross domestic product (GDP). Use of Bitcoin is expected to reduce costs from middlemen and ease the transmission of remittances.
El Salvador, Panama and Ecuador are ‘dollarised’ economies or economies who adopted the dollar as an official legal tender which makes them vulnerable to the US central bank’s policy changes. The US has taken an approach of improving the flow of money in the economy which demands frequent printing of dollars, in turn dampening the value of the currency. The shift to Bitcoin transactions would reduce the country’s vulnerability to the stability of the dollar and external monetary influence. As Latin American countries hold on to the US for a leg of financial aid as well, the move to Bitcoin is expected to reduce the presence of the US as a whole, analysts evaluate.
El Salvador President Bukele welcomed Bitcoin entrepreneurs and enthusiasts to invest in and become a part of El Salvador in hopes that their involvement will add to the economic growth of the country. The lack of property tax and capital gains tax on Bitcoin makes it an attractive investment for Bitcoin enthusiasts. Cryptocurrency company Tron will be the first crypto entity in El Salvador, its owner Justin Sun tweeted.
Sound the warning bells?
President Bukele announced with pride that he expected to see financial inclusion (offering banking and financial services to individuals) and job creation in the short term from the Bitcoin venture but experts remain unclear on how that could be achieved. El Salvador is an impoverished nation that reported a gross domestic product of $27 million in 2019.
Approximately 70 per cent of residents in El Salvador don’t have access to traditional financial services, so cryptocurrencies could be a step towards financial inclusion but the country does not have the infrastructure to support the idea yet. About 33 per cent of the population of El Salvador has access to the internet, according to the World Bank. Cryptocurrencies are also a new concept for most of the population.
The government announced plans to build satellite infrastructure to improve network connectivity in El Salvador but that would require an immense amount of time and investment. Experts are concerned that the adoption of Bitcoin complicates the $1.3 billion in aid the country had sought from the International Monetary Fund (IMF) for recovery from the coronavirus pandemic as the US is the largest member of the IMF.
Anna Tutova, CEO at crypto-consulting agency Coinstelegram says, “Nayib Bukele is a former marketing executive, so this move with acceptance of Bitcoin as a legal tender may be a pure PR stunt to attract attention to the country. Additionally, the current El Salvador's government has a reputation of corrupted one, so this decision may be to divert attention away from the current problems in the country.”
As indicated, President Bukele’s past as a marketing executive and his actions in power reveal a tint of authoritarian tendencies, and this casts a shadow of doubt over the intention of El Salvador’s Bitcoin plan. President Bukele was reportedly known to be in cahoots with former US President Donald Trump. Under the current US President Joe Biden, President Bukele was called out and asked to reverse the firing of top judges and an attorney general, which the latter refused.
The US State department published a list of 17 corrupt officials in May, four of whom held key positions within the cabinet and party of President Bukele. The tarnished reputation of the government paved the path for doubts that the bitcoin manoeuvre would result in increase in tax evasion and criminal activity as the digital currency is difficult to keep track of. Bitcoin’s decentralized (unregulated by a single authority) position and volatility is feared to destabilise the economy of El Salvador.
“Bitcoin is not a viable currency for every day transactions due to relatively slow transactions, high fees for small purchases and volatility. I consider Stablecoins (link to our Stablecoin story) are much better in this situation, still we perceive prices in dollars, rather than in Bitcoin,” added Tutova.
Verdict
El Salvador has made history with its move to adopt Bitcoin and has announced a fleet of ambitious plans to gear up the economy to achieve them.
Although experts largely see it as a leap of faith because the country’s infrastructure cannot support these ambitious plans in its current state. The government’s tainted reputation shows that the move could bring more harm than good.
El Salvador's announcement to adopt Bitcoin as a legal tender moved Bitcoin only 9 per cent in the day’s trade but remains as the spark of a new idea. El Salvador will be a nice social experiment for other countries considering the option and could be a deal breaker for the cryptocurrency world someday.