El Salvador becomes the first country to adopt Bitcoin as legal tender
The popularity of cryptocurrencies has only been increasing since the beginning of 2020, as most crypto assets have soared in price. Even with a considerable dip in the market over the last couple of months, the overall sentiment has not changed – in fact, more people may now be looking to buy crypto tokens due to their relatively lower price as compared to two months ago. It is also encouraging to see how cryptocurrencies are becoming a bigger part of our daily lives, with several businesses beginning to accept cryptocurrencies as a form of payment, especially online. However, widespread acceptance of crypto as a payment method is still some way off, especially in terms of its use as a replacement for fiat currency. In that vein, it has been extremely interesting to keep an eye on El Salvador, which became the first country in the world to make Bitcoin legal tender, through a law passed last week.
President Nayib Bukele’s proposal to make Bitcoin legal tender in the country was passed by the country’s legislature in an early morning vote last week, with the President then signing the bill into law. The law was passed with 62 in favour of it, while 19 legislators voted against it and three abstained. This news did provide a bit of a spring to Bitcoin’s price as well, which was up by 5% in the hours immediately following this announcement. With this law, prices in El Salvador can now be shown in bitcoin, tax contributions can be paid with the digital currency, and exchanges in bitcoin will not be subject to capital gains tax. The exchange rate with the U.S. dollar “will be freely established by the market,” according to the proposed law. El Salvador’s current official currency is the U.S. dollar. The law also says that the state will “promote the necessary training and mechanisms so that the population can access bitcoin transactions.
It is notable that nearly 70% of the country does not have access to traditional banking and financial services, which makes the adoption of bitcoin as an official currency a way to increase financial inclusion. This law comes after the country entered a partnership with the digital wallet Strike to build modern financial infrastructure using blockchain technology. Strike is also the digital wallet that is most used in El Salvador, becoming the highest-downloaded app on mobile phones in the country just a couple of months since its launch in January 2021. El Salvador is reportedly also working on a law that would grant permanent residency to any individual who invests at least 3 BTC in El Salvador’s economy.
The bill that was just passed will mandate all businesses to accept bitcoin for goods or services, but the government will act as a backstop for entities that aren’t willing to take on the risk of a volatile cryptocurrency, according to President Bukele. A trust that the government will set up at the Development Bank of El Salvador to instantly convert bitcoin to U.S. dollars will assume merchants’ risk, holding around $150 million in US dollars. The Development Bank’s trust fund would sell some of the bitcoin it receives for dollars to replenish the fund.
This development has been met with a lot of caution across the world, especially from the International Monetary Fund (IMF). which fears that the impact of Bitcoin’s volatility will be too great for it to be used as a regular currency. Officials from the El Salvador government are set to meet with the IMF in the coming days to discuss their plans.
While many countries are exploring the merits of using crypto and digital currencies, El Salvador is the first to actually make Bitcoin legal tender. It will be very interesting to see how this plan works and whether it causes any problems for the economy in the coming months.