Bitcoin as Legal Tender?

Nayib Bukele, President of El Salvador, declared last Saturday at the Bitcoin 2021 Conference that he will present a bill next week to legalize Bitcoin and make it legal tender in the Central American country.

Bitcoin as Legal Tender? Bukele assured that he was looking for ideas worldwide that would prepare his country for the future. And he considered that Bitcoin might be one of them.

Nayib Bukele presents a project to make Bitcoin legal.

In short, in a recorded message issued at the close of the 2021 Bitcoin Conference, Nayib Bukele announced that he would send to Congress a measure that makes Bitcoin a legal currency in El Salvador.

“This will create jobs and provide financial inclusion for thousands outside of the official economy.“

Jack Mallers supports this legislative initiative.

“They asked me to help them write a plan and that they saw Bitcoin as a world-class currency. And we needed to devise a plan to help these people.” Similarly, Mallers said on stage that he had lived in El Salvador for three months and found that about 70% of the population has no bank account. And 20% of the country’s GDP comes from remittances that migrants send to their families.

“More than 70% of the workforce in El Salvador does not have a bank account. They are not in the financial system. Bitcoin brings a way to protect developing economies from the potential impacts of their fiat currency inflation.”

In addition, Jack Mallers added that he would provide an open-source guide in the framework of this project, which he will call “Bitcoin for countries.“

The reasons

El Salvador’s president generated an informational uproar by announcing that his country will adopt bitcoin (BTC) as a legal tender, leaving more questions than answers. The president’s decision, if it materializes, would make the Central American nation the first in the world to embrace cryptocurrency as part of its monetary policy.

After spreading the news on the second day of the Bitcoin Conference 2021, Bukele shared the reasons that motivated him to favor BTC through Twitter. For the head of state, three aspects of the national economy could improve significantly with legislation that supports the use of the first cryptocurrency. Bukele believes that legalizing Bitcoin as a digital system and cryptocurrency will help El Salvador attract new investments, make the reception of remittances more efficient, and serve those not in the banking system.

Attract new investors

The president referenced the market capitalization of BTC and suggested that if a portion of those funds goes to the country, there would be economic benefits. 

“Bitcoin has a market capitalization of $ 680 billion. If 1% of it is invested in El Salvador, that will increase our Gross Domestic Product (GDP) by 25%“, explained Bukele about a hypothetical investment of 6.8 billion dollars in his country. 

The president did not clarify where the funds would come from: investments by bitcoin companies that would arrive in the country, initiatives of the cryptocurrency communities, or the creation of mixed capital companies to build new technological infrastructure.

More efficient remittances with Bitcoin

Giving a boost to bitcoin in El Salvador would make the reception of remittances more efficient, one of the primary sources of income in the country. About 25% of the country’s households receive money abroad for payments and consumption expenses. However, a significant percentage of the funds remain in the hands of intermediaries. 

For Bukele, Bitcoin would solve this situation with millions of dollars in direct income for its inhabitants, avoiding collecting commissions, handling cash, and possibly decreasing the crime rate. “Bitcoin will have 10 million potential new users and a fast-growing method of transferring $ 6 billion yearly in remittances. But, a large part of those 6 billion dollars is lost to intermediaries, “added the head of state. 

Bukele’s criteria are that, by using Bitcoin as a digital system and cryptocurrency, the quantity received by nearly a million low-income families will increase by the equivalent of billions of dollars every year. “This will improve the lives of millions of people,” he said.

Serving the unbanked with bitcoin

Legalizing Bitcoin as a national currency would allow the government to serve millions of unbanked people. According to Bukele, 70% of Salvadorans do not have a bank account and work in the informal economy. 

“Financial inclusion is not only a moral imperative but also a way to grow the country’s economy, providing access to credit, savings, investment, and secure transactions,” the president published on the social network.

The bill to recognize bitcoin will be presented next week before the legislature, Bukele announced on June 5. The president is confident that the first cryptocurrency “is just the beginning to offer a space in which some leading innovators can reimagine the future of finance.“

To reinforce his discourse on Bitcoin and encourage adoption, Bukele also joined the trend in the Bitcoin community to swap his Twitter profile picture for an image with ‘laser eyes.‘

The Consequences

Some think this is a big step for Bitcoin and initiates global adoption, while the cryptocurrency will save the mentioned country. However, others feel that it will ruin El Salvador and negatively affect the digital asset. 

Some influential bitcoiners like Marc van der Chijs see possible positive repercussions on the news. The businessman published a tweet in which he stated: “I believe it implies that there will be no capital gains tax on it anymore in other countries. The reason is that BTC is then an official foreign currency, and you don’t pay capital gains on other currencies.” That could mean you would not pay taxes over the bitcoin capital gains for those who buy and sell bitcoin at fiat earnings.

However, the information has also affected some people, including Roger Ver, president of Bitcoin.com and leading promoter of the cryptocurrency Bitcoin Cash (BCH), who commented in an interview with the BBC that Bitcoin would not serve as a currency. Instead, BCH would do a better job. 

On the other hand, the media places the news in a historical and economic context. They try to explain how the adoption of Bitcoin as a legal currency could lead El Salvador to ruin its foreign relations, especially with the United States, due to the outstanding debt that the country has with the North American giant. 

In this regard, “it is implausible that the Joe Biden administration (which was already dissatisfied with the government of El Salvador) ignores that a Latin American country, which has a lot of debt, begins to use the US dollar less than before. ‘Bitcoinization’ and dollarization are opposite phenomena. You can’t have more of both,” they point out.

Bitcoin is the people’s currency

The note adds that Bitcoin is the people’s currency and should be adopted from the bottom up, not the other way around, as it seems to happen in this case since the government has taken the step. Furthermore, some say, “Uncle Sam is likely to retaliate through some of the same economic and military tools that other Latin American countries have known for decades.” 

It is crucial to consider that many see Bitcoin as a means for money laundering, especially tax evasion by some authoritative groups such as GAFI (Financial Action Group International). Consequently, the US government would unlikely have a very different view. This fact could have negative repercussions for El Salvador. 

Regarding adopting Bitcoin from the bottom up, it could be that the people of El Salvador have done their thing because the country has kept up with Bitcoin ATMs, sending remittances with Bitcoin, and even a Bitcoin Lightning Network festival on El Zonte beach renamed “Bitcoin Beach.” This place is vital because it seems to be where it all began. 

On this, the founder of the Strike payments application, Jack Mallers (who presented the news at the Bitcoin Conference in Miami), has been promoting lightning payments with the local community.

The situation in El Salvador

Among the ideas considered on the subject, which President Bukele mentioned on Twitter, is that 70% of the residents of El Salvador lack a bank account and, therefore, do not have access to many products and services. 

Bitcoin is further thought to have the potential to help the poor by reducing the excessive fees they pay to intermediaries for remittances, giving them greater access to financial institutions, fighting inflation, and perhaps even helping to end corruption.

It is worth noting that the gross domestic product of El Salvador is USD 24.7 billion. Therefore, the president of El Salvador has communicated that he wants Bitcoin to help raise GDP and make sending remittances more efficient.

While many agree with Bukele’s position, others think it is a smokescreen to divert attention from economic problems. Hence, various manifestations of skepticism. But, in general, Twitter users express dissatisfaction with the situation in the country, especially some of the country’s people.

Comments such as the following stand out: “The elderly and poor people still in the country do not have access or the resources to be able to use this method,” or “Because we don’t have a digital president better, perhaps we would be better off.” Some even claim to return to the old national currency named Colón. Many demand that the president fixes current problems before discussing the future.