As a world first, El Salvador is making Bitcoin legal tender
© Reuters. FILE PHOTO: Bitcoin banners can be seen outside a small restaurant on El Zonte Beach in Chiltiupan, El Salvador, June 8, 2021. REUTERS / Jose Cabezas / File Photo
By Nelson Rentería, Tom Wilson and Karin Strohecker
SAN SALVADOR (Reuters) – El Salvador became the first country in the world to adopt Bitcoin as legal tender after Congress on Wednesday approved President Nayib Bukele’s proposal to adopt the cryptocurrency, a move that delighted supporters of the currency.
Legislators voted with the International Monetary Fund to enact Bitcoin law with 62 votes out of 84 possible, despite concerns about the potential impact on El Salvador’s program with the International Monetary Fund.
Touted the use of Bitcoin for its potential to help Salvadorans living abroad send remittances home, Bukele said the US dollar remains legal tender. El Salvador does not have its own currency.
“It will bring financial inclusion, investment, tourism, innovation and economic development to our country,” said Bukele in a tweet shortly before the vote in Congress, which is controlled by his party and allies.
In an idea he apparently came up with overnight, Bukele later said he hired state-run geothermal energy company LaGeo to come up with a plan to offer bitcoin mining facilities that use renewable energy from the country’s volcanoes.
He said the idea was to build a bitcoin mining hub around the country’s geothermal potential. He also said El Salvador would offer citizenship to people who provide evidence that they have invested in at least three bitcoins.
Bitcoin use will be optional for individuals and will not pose any risk to users, Bukele said, with the government guaranteeing convertibility to dollars at the time of the transaction through a $ 150 million trust created by the country’s development bank BANDESAL .
By law, Bitcoin must be accepted by companies if it is offered as a means of payment for goods and services. Tax contributions can also be paid in cryptocurrency.
“If you go to McDonald’s (NYSE 🙂 or whatever, they can’t say we won’t take your bitcoins, they have to accept it by law because it’s legal tender,” said Bukele in an online conversation with figures from the cryptocurrency industry in parallel with the debate in Congress.
Its use as legal tender will begin in 90 days with the Bitcoin-dollar exchange rate set by the market. Bukele said the government and central bank do not currently hold bitcoins.
Proponents of cryptocurrencies welcomed the move as legitimizing the emerging asset, but its impact on Bitcoin regulation, taxation, or adoption in other countries remains to be seen.
There were no immediate signs that other countries would follow El Salvador’s adoption of Bitcoin.
“Whether this will be the first in a trend and then snowballs or if this will be a slip, we will only know through history,” said Brandon Thomas, partner at the consulting firm Grayline Group.
Analysts have also said the move could complicate talks with the IMF, where El Salvador is targeting a more than $ 1 billion program.
Bukele said he would meet with the IMF on Thursday to discuss Bitcoin law, among other things. He said in preparing for the meeting, he tried to explain to them that the shift “will not change our macroeconomics”.
enjoyed its best day in two weeks, climbing up to 6% to $ 35,200.
“The market will now focus on the rollout by El Salvador and whether other nations follow suit,” said Richard Galvin of crypto fund Digital Asset Capital Management. “This could be a major catalyst for Bitcoin in the next two to three years.”
It wasn’t immediately clear how long Bukele had been working on the Bitcoin plan, but he said on Wednesday that he was inspired by a project called Bitcoin Beach, which introduced the cryptocurrency in a beach town in El Salvador last year.
He worked on the idea with Jack Mallers, CEO of Strike, a digital wallet that uses the Lightning Network to enable small payments in Bitcoin.
Bukele also pointed out a tweet from 2017, before he was a presidential candidate, in which he suggested using Bitcoin.
Emerging economies – where banking penetration is much lower than developed countries and reliance on foreign money transfers is much higher – have quickly warmed to cryptocurrencies.
Outside of the United States, the countries with the highest volumes of crypto production and trade are all developing countries, including China, Colombia, and India, according to BofA.
According to Bukele, around 70% of the people in El Salvador do not have access to traditional financial services.
However, the use of digital currencies in general can also pose risks to the dollar economy, analysts say.
“The main cause of dollarization is high local inflation, which could also get worse if digital currencies prove to be inflationary,” said David Hauner of BofA.
El Salvador relies heavily on money that is sent back by foreign workers. World Bank data showed that remittances to the country amounted to nearly $ 6 billion, or about a fifth of GDP, in 2019, one of the highest rates in the world.
The cryptocurrency theoretically offers a quick and inexpensive way to send money across borders without relying on the remittance companies that are normally used for such transactions. It is not clear what proportion of transfers to El Salvador are in Bitcoin.
Conversion of local currencies to and from Bitcoin is often based on informal brokers, while trading often requires technical knowledge.
El Salvador will promote training and mechanisms to enable access to Bitcoin transactions, the law says.
Financial regulators and policy makers warn that Bitcoin is making money laundering and other illegal uses easier.
Bukele brushed aside fears, saying criminals are already using US dollars and other assets to launder money.
“The problem is not the dollar, it is the criminals,” he said.