So, Bitcoin is Legal Tender. What Happens Next?
A closer look at El Salvador's Bitcoin Law
I have a lot of friends who, if you had asked them where El Salvador is earlier this year, couldn’t have provided an accurate answer. It’s not a country that makes headlines too often. But that all changed during the first weekend of June during Miami’s Bitcoin 2021 event. By now we all know just what happened: Salvadoran president Nayib Bukele announced that he had passed a bill to make Bitcoin legal tender in El Salvador and the bill was approved by the Salvadoran parliament. Starting on September 7th, anyone will be able to walk into any business in the country and pay for any product or service with Bitcoin. Not all citizens will be forced to use Bitcoin. The US Dollar will still circulate and be legal tender. But no business will be able to say “we don’t take Bitcoin here”. The question everybody seems to be asking now is what this means for Bitcoin and cryptocurrencies in general. But before trying to answer those questions, it’s useful to have a little insight into why Bukele thought this would be a good idea for his country. It’s also a good idea to take a look at the problems and controversies this move has raised, both in El Salvador and in other countries.
The background
The Salvadoran economy doesn’t have a particularly good track record. The government used to issue its own fiat currency, the colón. But years of bad monetary policy ended up landing the nation into the lap of hyperinflation. Things got so bad that the government itself ended up admitting they didn’t trust themselves to properly handle monetary policy, so they started using the US dollar as legal tender and that is the case to this day. So, in a way, Salvadorans already have some experience in using a currency that isn’t handled by their own central bank (of course, in this case it just means they entrusted their currency to a different government). About 70% of the population is unbanked, so cash flow on the streets is a lot higher than in other countries. Many people living in El Salvador have family members living abroad and remittances from those other countries are a big source of income. So large, in fact, that up to 20-25% of the country’s GDP comes from remittances, which are handled by companies that take commissions of 10-20%. In other words, the money-handling companies are getting the equivalent of up to an additional 5% of El Salvador’s GDP. Besides the fees, remittances often take several days to process and it might be necessary for the citizen to travel to a brick-and-mortar office to pick up physical cash.
These are the points Bukele is trying to address by making Bitcoin legal tender. First, people won’t need bank accounts at all. Just crypto wallets. And internet access, of course. This can be a problem for people living in rural areas, but the government has already established partnerships aimed at improving internet connectivity across the country. Then there’s the fact that remittances can get in a lot faster. People will be able to receive the funds sent from abroad within minutes, instead of days. Finally, and this is probably the big advantage for Bukele, there will be no more middlemen taking commissions and this will result in Salvadorans getting a higher percentage of what their families are sending. And these are additional funds that will be flowing into the country’s economy.
The issues
The legal aspects of implementing Bitcoin as the country’s legal tender weren’t much of a problem. The president sent the bill to a congress where his party has the majority and the bill passed just a few days later. Now they have to face the practical, technical and other issues and these won’t be as easy to overcome (although I won’t say they can’t or won’t be overcome). The first issue is that, just like in other countries, most Salvadorans don’t really understand blockchains and cryptocurrencies. And many of them simply may not want to understand. The government is trying to address this issue by creating introductory courses on Blockchains and Bitcoin so people can learn about them. Bukele’s Minister of Finance, Alejandro Zelaya, recently announced that the government had set aside a 120 million fund to create up to 4 million Bitcoins wallets with a 30$ free balance to promote the use of Bitcoin. But even Zelaya himself confesses they probably won’t reach that number. Another issue is technical: with a cap of 7 transactions per second, Bitcoin just doesn’t have the speed necessary to function as a country’s general payment processor. This issue has been addressed by partnering with Strike, whose wallets use the Lightning network to increase processing speed. Strike will be creating the official Salvadoran Bitcoin wallets (which are to be commonly called “chivos”), but users will be free to use any Bitcoin wallet they want, so not all of them will be using Lightning. How this is going to affect the blockchains usability is a question that will have to wait for its answer. Finally, the other issue this move has is Bukele himself. Salvadoran presidents don’t have the best track records. With three of the last four presidents charged with corruption and/or money laundering, a lot of people are questioning Bukele’s motivation for making Bitcoin legal tender. In January 2021 Transparency International stated that there were a lot of irregularities in El Salvador. The investigation into those allegations was cut short when the National Assembly removed the attorney general and other high-ranking officials of the Supreme Court. This action has created tension between the Salvadoran and US governments, with the latter accusing the former of being too authoritarian. Avoiding possible future US sanctions might be another reason for adopting Bitcoin. However, despite allegations or irregularities and accusations of authoritarianism. Bukele remains one of the world’s most popular leaders, with approval rates consistently around 90%.
So, what happens now?
Contrary to what most crypto enthusiasts might want to believe, El Salvador won’t likely become the piece that starts the worldwide mass adoptions of cryptocurrencies as legal tender. For starters, it’s a small country with a small economy that really doesn’t have the power to seriously shake up the traditional finance system represented by central banks, the World Bank and the IMF. The World Bank has already, unsurprisingly, denied El Salvador funding to help implement the “Bitcoin Law”. But there is enough interest in this move for other countries to start keeping tabs on how successful Bitcoin becomes in the Central American nation. Especially among countries who are experiencing high inflation or hyperinflation and/or wherever remittances from abroad are an important part of their GDP. They all know that Bitcoin as legal tender in El Salvador is basically an experiment and these other nations are happy to let Bukele run the experiment and wait for the results. The Marshall Islands are considering making cryptocurrencies legal tender, but there really hasn’t been a lot of push in this direction yet. Carlos Rejala, a member of the Paraguayan parliament, is planning to introduce a version of the Bitcoin Law for discussion and approval. And some Brazilian politicians have expressed publicly their support for Bitcoin. And, in Brazil’s case, we’d be talking about a big country with an economy large enough that it won’t go unnoticed. If Bukele can really manage to pull it off, and adopting Bitcoin does effectively boost the country’s economy and provide benefits for its citizens, then probably other countries will follow suit and that could really get the ball rolling. If he can’t, then the next president (Bukele’s term ends in 2024) could undo the law and get rid of Bitcoin’s legal tender. Bukele knows there’s a lot riding on his success, so he’s giving a lot of incentives: from reminding potential crypto investors that there is no property tax in El Salvador, to ordering the prepping of facilities for Bitcoin mining based on clean geothermal energy of which the country has plenty, to offering citizenship to all crypto investors, he is doing practically everything he can to encourage big crypto tech companies to move to El Salvador. For all of us in the rest of the world, we’ll be keeping an eye on what happens in the world’s first Bitcoin nation. And all of us crypto enthusiasts are keeping our fingers crossed for El Salvador to pull it off. Only time will tell.
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Of course, time will tell everything. But I think that if Bukele's doing something tremendous can benefit his country and citizens with this project, it will make a big impact.
I wish America was cool enough to do something like this, it would help with the debt problem with China, that's for sure.