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Recently at the Bitcoin 2021 conference in Miami there was possibly one of the biggest announcements in the cryptocurrency space this year. The president of El Salvador in central America Nayib Bukele announced that his small Central American country of 6.5 Million people was going to make Bitcoin legal tender. This is alongside the US dollar ( legal since 2001) and their own currency “colons” which are barely used. Like with many other smaller less politically and economically stable countries, the US dollar is often used as the de facto currency for stability and trustworthiness. This proclamation was quickly followed with legislation that passed through their Congress. This officially declared Bitcoin as legal tender that could be used to discharge all debts both public and private. As you can imagine this news has caused huge reactions and excitement around the world.
Remittances to El Salvador using Bitcoin
Bitcoin has actually had quite a history in El Salvador. Like many central and south American countries, they have had issues with political turmoil, currency devaluation and unemployment. This has caused emigration of its young and educated workforce to countries with more economic opportunities. These people need to send money back home to their families that still live in El Salvador. Resulting in a large market for remittances from Salvadorians living in more prosperous nations like Spain or the United States. Remittances are normally carried out via services like Western Union or the existing banking infrastructure. These services are inconvenient and carry high fees. Leading people to turn to Bitcoin for a quicker and cheaper method of value transfer.
Similarly, citizens from countries like Argentina and Venezuela have also turned to Bitcoin as a savings vehicle. Even with the volatility in the price of Bitcoin it has shown to be a far better store of value than a hyper-inflating currency like the Venezuelan Bolivar. The president of El Salvador wants to embrace and encourage the advantages that using Bitcoin can bring. Hoping that it will spur new growth and bring investment into the country.
The Legislation and what it means
So what does this actually mean for the people of El Salvador and Bitcoin? The Bitcoin Bill passed by a majority in the Salvadoran Congress. It gives Bitcoin the same legal standing as the Dollar and can be used anywhere to buy goods or services. Prices can now be displayed in Bitcoin and merchants and service providers must accept payment in Bitcoin. Taxes can also be paid in Bitcoin and most importantly gains in value from the exchange of Bitcoin will no longer be subject to capital gains tax. This last point is arguably the most important for Bitcoin adoption. Currently, many countries class Bitcoin as an asset as opposed to a currency. This leads to complicated and expensive tax implications if someone wants to buy or exchange bitcoin for a good or service. This has also hampered the ability of Bitcoin to grow and be used more extensively.
Within the bill they have written and highlighted some specific wording that is very interesting and really does give teeth to the bill and its application in El Salvador.
“The state is under the obligation to promote and protect private enterprise, generating the necessary conditions to increase national wealth for the benefit of the greatest number of inhabitants,”
It also declares that because approximately 70% of the population do not have access to traditional financial services….
“… it is the obligation of the state to facilitate the financial inclusion of its citizens in order to better guarantee their rights.
This is a very interesting and powerful piece of legislation. If implemented as it’s written it forces the state to make a real and significant effort to promote and integrate the use of Bitcoin. They would have to provide the necessary means for its poorer citizens to participate in this upcoming financial revolution.
“The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.”
President Bukele has really embraced the Bitcoin ethos and seems to be a huge proponent of this decentralised technology. He expects the introduction of bitcoin to generate growth across the economy while improving financial inclusion across the population.
El Salvador should be a really interesting test case for the introduction and use of Bitcoin as a legal tender currency. Bitcoin via the lightning network has already made a strong and positive impact in certain regions and communities across El Salvador. Such as the Bitcoin Beach project where a local community has come together and uses Bitcoin via the lightning network to conduct commerce and exchange value. The lightning network is a method of using Bitcoin with reduced transaction fees and quicker confirmation times and is far more suited to things like buying a cup of coffee. Bitcoin beach is believed to be the inspiration for President Bukele considering the Bitcoin Bill. He visited and was impressed with all the business and commerce operating seamlessly between people.
This development has also caused quite a reaction globally. There are many countries that are actively trying to ban or at the very least heavily restrict the use and growth of Bitcoin. The fact that a sovereign independent nation has declared Bitcoin as Legal tender in their own country throws up some interesting questions in terms of how it can be regulated and restricted elsewhere. There is also the question of does Bitcoin now have to be listed or accepted on foreign exchanges and trading desks?
Green Bitcoin Mining
In a later video and subsequent tweet President Bukele also discussed the possibility of utilising the country’s renewable electricity to mine Bitcoin. Tweeting that he had instructed the head of the country’s Geothermal company to put a plan in place to facilitate and develop a Bitcoin mine with new capacity.
El Salvador currently produces over 200 MegaWatts of electricity from harnessing the heat generated by volcanoes. The country also has another 100 Megawatts in planned development. Innovative steps like these should also help to tamp down the environmental concerns and related FUD that people throw at Bitcoin regarding its high energy usage through its proof of work mining algorithm. See our previous article on this where we break down what bitcoin mining is and how it’s going green.
This will also bring the added benefits of increased utilisation of the excess energy being produced in these remote locations. People normally don’t live near active volcanoes – so the energy needs to be transmitted to population centers or it would be wasted. This will also give the country an income stream of newly mined Bitcoins that they can use to bolster their treasury and fund further investment and social programs.