El Salvador government became the first to make bitcoin legal money in September 2021. This implies that it may now be used to make payments and settle debts if firms have the necessary equipment. Importantly, one of the consequences of this legislative reform is that if creditors refuse to accept debt settlement in bitcoin, the debt is annulled.
It is important to note that El Salvador has been fully dollarised since 2001, which means that it does not have its own currency and is wholly reliant on the US dollar. Because of the latest legislation, bitcoin will now coexist with it. But, in practice, what does this mean? Can bitcoin truly outperform the dollar in terms of popularity and help El Salvador?
Money has three purposes:
- it serves as a unit of account, a means of exchange, and a store of value.
- To be termed money, an object must serve all three roles.
- Bitcoin is traded on worldwide marketplaces, making it a standard unit of account or measure of worth for products and services.
Furthermore, as legal money in El Salvador, bitcoin must be accepted for payment of goods and services on a domestic level, making it a viable means of exchange. However, the third of these roles, value storage, is critical for establishing “excellent” and “popular” money.
Money is accepted and widely utilized because of its steady and predictable worth. To comprehend bitcoin’s capacity to serve as a good store of value, consider the following. We must distinguish between bitcoin as an asset and bitcoin as a payment method.
- The value of bitcoin in US dollars has risen since 2014.
- If you had invested in bitcoin before 2020, you would now have an asset worth several times what you paid.
- As an investment, bitcoin would have been an excellent pick.
- That is no longer the case as of2020, and the timing of your investment would have been critical.
- As a result, bitcoin is no different from any other asset type.
- Assessing volatility, timing, and investment horizon are all aspects that will influence whether or not an investment is lucrative.
This provides a distinct picture and aids in understanding the cryptocurrency’s capacity to hold value and function as a method of payment. For example, on July 4, 2021, the value of bitcoin in comparison to the US dollar fell by 12% compared to the previous month. It rebounded by 8% on August 4, 2021, but not the whole value it had lost the previous month. If one chose to have their pay denominated in bitcoin, as Salvadorans may today, the graph would indicate two things.
For starters, the amount of their monthly salary would have ranged between first, the value of their monthly salary would have ranged between 180 percent and -65 percent since 2014, and that movement would have been quite unpredictable during this 6-year period. All of this is significant if prices in El Salvador continue to be denominated in dollars, with daily conversions between the two.
El Salvador and Cryptocurrency
For the past 20 years, the country has been entirely dollarized, and at the moment, two-thirds of Salvadorans are opposed to utilizing bitcoin. Furthermore, because the country has a continuous trade imbalance with its largest trading partner (the United States), it will continue to require dollars to fund that trade. As a result, it is difficult to envision how the dollar’s use will decline.
There is one area where bitcoin may make a difference, however: enabling remittances. Every year, Salvadorans in the diaspora transfer the equivalent of 20% of GDP back home via remittance services such as Western Union. If bitcoin becomes popular, it might result in a significant decrease in remittance expenses, which could amount to $400 million per year, according to some estimates.
Many additional topics are presently being contested, ranging from the motive for this experiment to privacy concerns in the design of electronic wallets to the political intents of this action. All of these variables contribute to trust, and ultimately, for a currency to gain popularity, there must be faith that its value will be regulated to guarantee its stability and predictability. For the time being, the conditions are not in place for this to occur.
The Latin American country is still grappling with the volatility of Bitcoin when used as a medium of trade, as well as acquiring widespread knowledge and acceptance from its people. Prior to June 2021, news about Nayib Bukele was most likely not even a blip on the radar of many cryptocurrency users.
Instead, the Salvadoran president garnered news for claims of corruption and dictatorial conduct when his party’s parliament majority fired five members of the country’s Supreme Court and the country’s attorney general. However, during the Bitcoin 2021 conference in Miami, Bukele startled many attendees and drew international attention by revealing his intention to have El Salvador accept Bitcoin (BTC) as legal cash.
Within a week, a supermajority of the Salvadoran Legislative Assembly — most of whom belonged to Bukele’s own party — had enacted the Bitcoin Law, forcing all enterprises to accept the crypto currency alongside the US dollar as a means of payment. Bukele’s engagement in the cryptocurrency deployment appeared to be more extensive than many would have expected from a global leader.
The Salvadoran president was already engaged on social media and dressed differently than many politicians, frequently in baseball cap and trousers. Since the implementation of the Bitcoin Law in September, he has used his Twitter account to announce many BTC purchases totaling 1,391 BTC – more than $71 million, allegedly from El Salvador’s national treasury.
He also suggested that the government use geothermal energy by mining cryptocurrency from its volcanoes. Domestically, resistance to the Bitcoin Law took the shape of public declarations from parliamentarians unaffiliated with Bukele’s political party, as well as rallies in San Salvador.
Prior to the law’s implementation on Sept. 7, a group of retirees, veterans, disability pensioners, and employees marched through the capital city to express their worries about the volatility of the crypto currency and how the Bitcoin Law may potentially harm their pensions.
Protesters calling themselves the Popular Resistance and Rebellion Block marched through the streets with banners reading “No to Bitcoin” to push for the law to be repealed. Authorities outside of Bukele’s area of control were likewise skeptical about the rollout.
Victoria Nuland of the United States Department of State urged El Salvador in June that El Salvador should take a “hard look” at Bitcoin to guarantee it is “fully regulated” and “honest,” and the government will provide protection “against harmful actors.”
”In July, the International Monetary Fund issued its own warning, stating that a country adopting Bitcoin as its official currency “may be terrible.” Bukele sponsored efforts to construct the infrastructure needed for Salvadoran merchants and regular residents to utilize cryptocurrency, in addition to assisting in the establishment of the regulatory framework for the adoption of BTC payments.
The country already has Bitcoin Beach, a location in the municipality of El Zonte that is supposed to be an experiment in which Bitcoiners may use cryptocurrency to pay for everything, from electricity bills to tacos.
Officials have also been in charge of the installation of hundreds of Chivo ATMs will be installed, allowing Salvadorans to withdraw funds 24/7 sans paying charges on their cryptocurrency assets. However, one statement that will likely stand out as the most ambitious of Bukele’s crypto ambitions for 2021 is the establishment of Bitcoin City, which will be funded initially with $1 billion in BTC bonds.
Bitfinex and Blockstream have previously stated their intention to support the effort, which aims to eliminate capital gains, income, property, and payroll taxes. With the implementation of the Bitcoin Law, the accusation of Bukele ruling like an authoritarian was lessened, although coverage was frequently linked with his pronouncements on “buying the drop,” proposing a 24-hour Bitcoin news network, and other crypto-related happenings in the country.
There are few signs that the president has moved on from his self-identification as the world’s “coolest dictator” — a Twitter bio he subsequently modified to “CEO of El Salvador.”
Prior to the adoption of the Bitcoin Law, authorities arrested a San Salvador citizen who had spoken out against the country’s use of Bitcoin as legal cash. Following multiple protests against Bukele’s measures, the government outlawed meetings in October, stating that its steps were intended to prevent the spread of COVID-19 — although it still recognized sports and cultural events as exceptions.
“The crypto community’s acceptance of Bukele, of all individuals, demonstrates that they need to think a little more. This man is an authoritarian who can’t give fundamental services to his population,” said Tommy Vietor, a Pod Save America political pundit.
“[El Salvador] has one of the world’s highest murder rates.” He seemed to believe that you may obtain electricity by putting your Apple charger into a volcano in some way. Don’t attempt to pitch us on an actual volcano-fueled tech paradise metropolis; instead, let’s start small.”
By the end of 2021, it was still unclear if the typical El Salvadoran citizen was receiving significant benefits from the Bitcoin Law. In October, Bukele announced that animals will benefit from cryptocurrency, with the development of a $4-million veterinary facility sponsored by income from the country’s Bitcoin trust.
Yet, it is probable that the Latin American country is still trying to deal with the volatility of the crypto asset when used as a means of payment, as well as garnering broad acceptance and understanding from its people.