Bitcoin Is Now Legal Tender in El Salvador - What Does This Mean?
The potential effects for the country, the world and for Bitcoin
On September 7 — just 3-months after the President of El Salvador announced his intention for Bitcoin to become legal tender in the nation, it finally happened.
Legislation unanimously approved by the government of El Salvador has been enacted. It means that shops can accept payment in either Bitcoin or US Dollars and people are now allowed to pay for goods and services in either currency too.
In the Bitcoin community, President Nayib Bukele is the hero of the day.
As September 7 dawned, El Salvadoran Bitcoin enthusiasts shared videos and posts online as they paid for coffees in Starbucks and breakfasts in McDonalds. They were just a few early examples of businesses and citizens who were keen to adopt the cryptocurrency as an integral part of their country’s economic system.
Source: Twitter
The day wasn’t a universal success by any means — a protest of around 1,000 citizens was held in the capital, San Salvador. Protestors were objecting to the suitability of the currency for the purposes of the entire nation and presumably, the speed with which the initiative has been implemented.
The Chivo Digital Wallet App released by the government to coincide with the launch and which is subsidized to reduce transaction costs for users, had to be temporarily shutdown as it struggled to cope with demand and volume of transactions.
The price of Bitcoin also fluctuated wildly in the course of the day too — dropping from a recent high price of over $53,000 to just over $43,000. It later recovered to above $46,000. The moves, while not unusual and somewhat irrelevant to the adoption of Bitcoin in El Salvador did little to instill confidence. It gave the media fuel for their usual cliched attacks on Bitcoin and Cryptocurrency.
It was destined to be an eventful day, and it turned out that way. But what are the likely future effects of Bitcoin now being a legally accepted form of tender in El Salvador, in the medium to longer term?
For El Salvador and its citizens
Some of the fears that likely prompted the protest against Bitcoin originate in the country’s speedy adoption of the US Dollar as its primary currency in 2001. There were undoubtedly some who perceived that they suffered financially as their previous currency — the colón was replaced at that point by the US dollar.
Others may well have been protesting out of a lack of understanding or appreciation for the merits of Bitcoin — as a technology and an instrument of value it is technically complex and still widely misunderstood, even at the highest levels of government around the world.
There were others still who were protesting simply as they disagree with whatever initiatives are launched by President Bukele. Had he outlawed Bitcoin in the country (which already has a thriving community of Bitcoin users through its world-leading ‘Bitcoin beach’ project) then some would have been protesting that instead.
What are the likely effects for its citizens and for the nation?
Access to financial services is a positive
There are many benefits that Bitcoin offers, many of which originate from it enabling access to financial infrastructure in a nation that is largely unbanked.
The majority of citizens don’t have access to basic financial products or infrastructure which forces them to deal in cash and denies them the opportunity to pay for goods or receive and hold funds electronically.
With access to a free digital wallet app (either the Chivo wallet launched by government, or another) citizens of El Salvador can now do all these things safely, securely and easily. It’s likely that other spin-off financial services will become available in El Salvador too, such as loans that are issued and managed via the Blockchain.
El Salvadorans living around the world can now send and receive money electronically across borders using Bitcoin. This is particularly relevant given that many of its citizens have, over time, migrated to the US and still send money back to family within the country.
In 2016, approximately 1.2 million El Salvadoran immigrants lived in the United States. They sent $4.6 billion in remittances back to El Salvador, making up 17 percent of the country’s Gross Domestic Product (GDP).
A number of these remittances were likely often made in cash, certainly for those whose family were unbanked. This likely accounted for the prevalence of US Dollars within the economy of El Salvador.
With Bitcoin now being legal tender, and given that it can easily, quickly and cheaply be sent across borders, the flow of wealth between El Salvadorans can be enabled seamlessly.
Concerns and controversies
Haters will always find ways to hate.
Institutional objections
As is typically the case when governments and conventional financial institutions approach Bitcoin, there has been a fair amount of pushback against El Salvador’s decision to adopt it as legal tender.
The World Bank was quick to reject El Salvador’s request for help in implementing their Bitcoin law, citing a reluctance to be associated with what it described as Bitcoin’s “environmental and transparency shortcomings” — two of the more cliched objections that can be easily debunked with a little research.
The IMF shared that it saw “macroeconomic, financial and legal issues” with the El Salvadoran proposal. They later issued an article entitled “Crypto Assets as National Currency — A Step Too Far”. That blog post also relied on tired rhetoric and ill-informed perspectives.
In July, the credit rating service Moody’s downgraded El Salvador following their announcement, again citing the risk to macroeconomic stability.
The sentiment behind such objections is unfortunately the norm when Bitcoin is addressed by conventional financial institutions.
What’s significant this time, is that El Salvador is blazing a trail — the effects that emerge from its adoption could either add substance to the objections. Hopefully though, the positive effects will go a long way to disproving them instead.
Will El Salvadorans be forced to use Bitcoin?
There’s no intention to stop the US Dollar from being accepted in El Salvador and the Chivo app gives users the ability to immediately swap Bitcoin received into US dollars if they wish.
In spite of this, many commentators (including hardcore Bitcoin maximalists) have expressed concern over Article 7 of the El Salvador government’s Bitcoin laws, which states that all vendors must be willing to accept payment in Bitcoin:
Source: Twitter
This could be seen as the government coercing its people into using Bitcoin.
There are other caveats and clauses within the legislation which temper this Article of law, including those which provide exemptions for those who don’t have access to the requisite technology (Article 12) and those which state that the government will provide alternatives that allow the user to access means of transacting in Bitcoin and immediately converting this to US Dollars if they wish (Article 8).
These provisions are positive — better still would be to not have any article which mandates Bitcoin adoption and instead to let it be adopted organically by the people.
Can President Bukele be trusted?
In some circles, there is doubt over whether the visionary President of El Salvador is entirely trustworthy. Some speculate whether the implementation of Bitcoin as currency is another example of him acting in an authoritarian manner to drive through a personal agenda.
Certainly he’s a divisive character — active and adept at portraying an image and communicating effectively via conventional and social media. There have been instances where Bukele’s actions seemed extreme — when he brought 40 armed soldiers into parliament during a debate on funding for the armed forces, for example. It was described as an act of intimidation, and could easily be seen as such by even the most moderate Bitcoiner.
Perhaps the world should separate the various issues and not allow Bukele as a personality to become intrinsically associated with his actions regarding Bitcoin. The initiative is well-meant and has a lot of potential to benefit his nation, not just those in the higher seats of government.
If Bukele acts in a way that’s unacceptable for a national leader in other matters, then that would be dealt with via other mechanisms and global institutions. It doesn’t have to detract from what could be achieved by his country adopting Bitcoin.
The effects for the wider world
Many other nations who find themselves in a similar position as El Salvador was — with an unstable or devalued native currency, an excessive reliance on the US Dollar or a largely unbanked population — are likely watching events with interest. If El Salvador succeeds in its initiative then it seems likely that similar nations could follow a similar path.
There could be other knock-on effects in normalizing Bitcoin and broadening its acceptance around the world. For many, the very concept of cryptocurrencies is meaningless — an idea that simply can’t be comprehended as having any real-world application or value.
If an entire nation can demonstrate that it can be successfully adopted and used as a means of exchange of value, then that proves irrefutably one of the main use-cases of Bitcoin — or any currency. It demonstrates viability, once and for all.
The effects For Bitcoin
El Salvador is significantly broadening the population of the world that has access to, and which understands and appreciates Bitcoin. It’s demonstrating at scale that cryptocurrency can be adopted and used as a means of enabling transactions, and of allowing citizens to access the rails of consumer finance.
It’s a live, real world pilot that will demonstrate benefits and opportunities and which will also, undoubtedly flush out problems and issues that the community of Bitcoin users, blockchain developers and financial institutions can tackle and overcome.
There is also a prospect that Bitcoin, in now being considered and accepted as legal tender might be properly classified by financial institutions and government agencies as a currency rather than as property (which is how the IRS currently treats crypto).
Bitcoin maximalists have speculated that El Salvador’s new laws could overturn IRS rulings that designate gains from Bitcoin holdings as liable for capital gains tax. Time will tell if this changes.
What next?
We’re in the very early days of El Salvador’s Bitcoin journey and it would be wrong to declare it a success or failure based on the events of the first day.
There will be technical issues.
There will be radical fluctuations in the price of Bitcoin.
There will undoubtedly be financial success stories.
There may be scandals, problems and scams that are put down to Bitcoin.
What happens next is largely down to the people of El Salvador, as much as it is down to Bitcoin itself.
Fundamentally, there are a significant number of positive and beneficial effects that could emerge from the scheme. It’s one that many, myself included, will watch with interest, optimism and hope.
Originally published on Medium