President Nayib Bukele announced El Salvador will make Bitcoin a legal tender in his country during the Bitcoin Miami conference. That was huge news of the whole conference and made a lot of headlines. In an early Wednesday vote (today), a supermajority of the nation’s legislature (out of 84) voted in favor of the President’s proposal. As of now, El Salvador officially recognizes bitcoin as legal tender.
What is legal tender?
Let’s unpack everything. Firstly, what is legal tender? As investopedia explains
“Legal tender is anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages.”
Or in other words, legal tender is the legally recognized money within a given political jurisdiction of a country. Bitcoin is now recognized as money in El Salvador alongside the US dollar.
Why adopt BTC?
The reason behind adopting BTC on a national level in an effort to boost financial inclusion in a country where 30% of its citizen have access to financial services. It’s also a potential help for Salvadorans living abroad that want to send money back home. Not everyone has access to basic financial services, which would solve a big struggle for many families.
But what about the price volatility? Cryptocurrencies aren’t known for price stability, rather the opposite. The government will set up a trust controlled by the Development Bank of El Salvador to instantly convert Bitcoin to USD. It will hold about $150M in USD. The use of bitcoin will be optional for individuals and would not bring risks to users, Bukele said. The government guarantees convertibility to dollars at the time of transaction through the trust, as mentioned above.
Under the law, bitcoin must be accepted by firms when offered as payment for goods and services. Tax contributions can also be paid in cryptocurrency.
“If there’s an ice cream parlor, he doesn’t really want to take the risk, he has to accept bitcoin because it’s a mandated currency, but he doesn’t want to take the risk of convertibility, so he wants dollars deposited in his banking account, when he sells the ice cream, he can ask the government to exchange his bitcoin to dollars. Of course, he can do that in the markets also, but he can ask the government to do it immediately.”
The Development Bank’s trust fund would sell some of the bitcoin it receives for dollars to replenish the fund.
Still, some legislation procedures need to be done as Government officials from El Salvador will meet with the International Monetary Fund in the coming days to discuss the transition plan.
There are talks and ideas around utilizing El Salvador geothermal capabilities for Bitcoin Mining.
Another exciting thing that is open to everyone is gaining citizenship by donating 3 Bitcoin into the nation’s economy.
But there are also some potential dark turns for the economy and the country, like inflation. Reuters explains it quite well in its article.
I think, whether it would be Bitcoin/Ether or any other cryptocurrency made as legal tender, it’s a win for the whole cryptocurrency space. I saw folks on Twitter arguing the stupidity of making Bitcoin instead of Ethereum or X Token. Such discussions aren’t helping anybody. Other cryptocurrencies would be a better choice, but that doesn’t mean I don’t admire the current decision and make cryptocurrency legal tender. It may or may not influence other countries to follow. It doesn’t mean it needs to stop only on Bitcoin. Other countries can adopt, for example, Ether.
But let’s not forget it’s a big win for all of us working in the industry. We’re still making baby steps in the space, and things only starts getting interesting.
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