El Salvador has become the first country in the world to officially treat bitcoin as legal means of payment. The trend for developing economies to actively engage into the crypto economy has long been there. The moderate role of banks in such countries (for example, India and Columbia) and high share of outbound remittances are the marked features of these economies. 

A disruptive decision to be ahead the curve 

El Salvador made news headlines when it announced to become the first country accepting bitcoins as a legal tender within 90 days. It means that bitcoin can be optionally used as the payment method in various settlements, along with the US dollar. In other words, every business enterprise or businessman should be able to accept bitcoins as a means of payment for goods and services as long as this business is able to provide the technology. 

This decision received 62 votes out of 84 possible votes in the Congress of El Salvador.
The planned changes will take effect starting September 7, 2021

The plans are to set up more than 1.500 bitcoin ATMs in the country. The ATMs will work for both buyers and sellers of the first digital currency. The president of El Salvador has commented on this decision on Twitter:

“It will bring financial inclusion, investment, tourism, innovation and economic development for our country”

This is not the first experiment of that kind for Salvadorians. In 2001, the US dollar received the status of domestic currency in the country. It was done to improve macroeconomic stability. 

Economic background: sending money home will be easier 

Locals heavily rely on the money sent by more than 2 mln work migrants from abroad. This share makes up to 20% of the Gross Domestic Product of this Central American country. The step introducing Bitcoin as an official currency will make sending remittances much easier. This way,   payments from abroad will be saved from high commissions and transaction costs. According to the estimates, the total amount of these payments makes $4 bln per year.

Pensions and salaries will continue to be paid in the US dollars. It’s important to highlight that 70% of citizens of El Salvador don’t have bank accounts and largely pay with cash. Also, the country does not have its own national currency. 

To ensure the convertibility of bitcoins to dollars, the government is going to set up a special $150 mln trust at the Bandesal bank. At the moment, there are no bitcoin reserves being held by El Salvador’s Central bank and government. 

It will also be possible to pay taxes with bitcoins. 
When a new legal tender will be started, a US-bitcoin exchange will be set by current market rates. 

How the world reacts to the decision made by El Salvador

Some commentators see this innovation as a positive and game changing step. At the same time, the decision of El Salvador has not received direct support from the World Bank. The World Bank will, however, advise the country’s authorities on measures enhancing transparency and improving the regulatory routine. Another international financial institution having concerns over El Salvador’s plan is the International Monetary Fund. It also raises questions regarding implementation of the IMF program for El Salvador. As a result, spreads on the country’s bonds will widen because debt investors asked for higher premiums to serve the country’s debt now. Overall, risks for regulatory financial institutions are expected to increase. 

The United States calls El Salvador for a transparent and well-regulated approach to the use of bitcoin. During her meeting with El Salvador’s President, Victoria Nuland, the Under Secretary of State for Political Affairs, expressed her concerns regarding bitcoin.  

Other comments point that only history is able to show whether the current course of action works out in the long term. The outlook for this initiative also depends on if other countries will join the trend. 

Risks should not be underestimated, too, especially if bitcoin gets inflationary under these circumstances. Extreme volatility of bitcoin raises concerns as well. Whereas hedge funds, investors, market players take advantage of this volatility and can mitigate these risks, common citizens can face sudden drop in the exchange rate of the popular digital asset.

Another group of risks is associated with the role of bitcoins in money laundering and other illegal activities. The last concerns were not shared by the country’s leader who said that money launderers successfully handle US dollars. 

The urge to choose bitcoin as a means of payment is an important indicator of high costs of existing banking service in developing countries. Some critics pay attention to this aspect and call the community to have a fresh look at the status of things in this field. 

Further steps on the way to the crypto universe 

El Salvador’s President Nayib Bukele has also made some steps to facilitate bitcoin mining in the country. This task was delegated to the state enterprise, a geothermal company LaGeo. The source of renewable energy for bitcoin mining will be volcanoes, i.e., geothermal energy received from them. It is planned to set up a Bitcoin mining hub. 

It was also stated that all those who invested at least 3 bitcoins can expect to get citizenship of El Salvador.
Special governmental training will be arranged for businesses to help them adjust their processes for the new payment system.

Curious facts

Nayib Bukele, El Salvador’s President, is gaining a reputation as an avid supporter of cryptocurrency. His Twitter profile photos were edited to picture him with laser eyes, a popular meme feature of cryptocurrency fans. 

The last known measure to boost bitcoin adoption in the country was the initiative to grant each citizen $30 worth of bitcoin for signing up for a digital wallet. This bonus has been offered since June 25, 2021. A citizen shall download and register with their real name and phone number in the state-owned “Chivo” app. Following this, the funds will be deposited. The exchange for the US dollars will also be available in this wallet.


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