El Salvador to adopt Bitcoin as legal tender! Event summary and analysis

On the 9th of this month, El Salvador made headlines in many news outlets as the first country in the world to adopt Bitcoin as legal tender, marking a historic moment! This edition of Medium will take you through recent important events in El Salvador, analyze the 4 main reasons for passing the Bitcoin law, as well as the 3 major concerns, and finally share thoughts and perspectives.

Important Events Summary

June 6: President of El Salvador Announces Proposal to Make Bitcoin Legal Tender

The President of El Salvador, Nayib Bukele, announced on June 6th that he would submit a proposal to Congress to make Bitcoin the country's second legal tender alongside the US dollar. If passed, the law would allow Bitcoin to be used for debt repayment, settlements, and transactions in banks.

June 9: Bill Passed, Making El Salvador the First Country to Adopt Bitcoin as Legal Tender

In just three days, on June 9th, the Salvadoran Congress passed the bill with an absolute majority, making El Salvador the world's first country to adopt Bitcoin as legal tender. The government emphasized that Bitcoin would not replace the US dollar, and related infrastructure is expected to be in place within 3 months.

June 10: IMF Expresses Concerns about Potential Economic, Financial, and Legal Issues

Despite the swift approval, the International Monetary Fund (IMF) expressed concerns on June 10th, warning that adopting Bitcoin as legal tender could lead to various economic, financial, and legal issues. It is worth noting that El Salvador's request for a loan program exceeding $1 billion from the IMF may face obstacles due to the COVID-19 impact.

June 16: World Bank Declines Assistance to El Salvador on Bitcoin Matters

In addition to the IMF's concerns, on June 16th, the World Bank stated that it could not assist the Salvadoran government on Bitcoin-related matters due to concerns about currency transparency and environmental reasons. However, the Central American Bank for Economic Integration (CABEI) has formed a technical team to provide advice to El Salvador.

June 22: Opposition Party Claims Bitcoin Law Unconstitutional, 80% of Citizens Disapprove Bitcoin Payments

The Vice President of the opposition party, Farabundo Martí National Liberation Front, Jamie Guevara, stated on June 22nd that the law to make Bitcoin legal tender is unconstitutional and lacks legal basis. According to a survey by the Salvadoran Chamber of Commerce, 80% of Salvadorans do not agree to accept Bitcoin payments.

June 25: Bitcoin Law Set to Officially Take Effect on September 7th, Bitcoin Payment Wallet to be Released

President Nayib Bukele of El Salvador announced in a national broadcast that the Bitcoin law will officially take effect on September 7th, with every citizen receiving $30 worth of Bitcoin. Additionally, during the broadcast, he showcased the upcoming Bitcoin payment wallet "Chivo," expected to launch in September this year.

Four Reasons for Adopting Bitcoin as Legal Tender

1. Establishing a New Financial Infrastructure

According to the Global Findex Database (2017) report, nearly 70% of people in El Salvador do not have bank accounts, posing a significant challenge for basic financial services such as transfers, cross-border payments, and savings habits. By making Bitcoin a legal tender, individuals would only need to install a Bitcoin wallet on their phones to access these financial services without the need for a bank account or cash.

2. Addressing High Fees and Inconvenience in Cross-Border Payments

El Salvador, with a population of 6.45 million, has over 2 million people working in the US or neighboring countries, sending an estimated $6 billion in remittances back home annually, equivalent to 20% of El Salvador's GDP. The process of cross-border remittances incurs high fees and time delays, burdening both senders and recipients with extra costs and inconvenience. Utilizing Bitcoin payment channels can improve efficiency and save significant fees.

3. Promoting Bitcoin Industry Development to Boost the Economy

With the Bitcoin law in place, President Nayib Bukele is gradually expanding investments in the Bitcoin industry and infrastructure, including partnerships with digital wallet Strike to build Bitcoin-centric financial facilities and using volcanic geothermal energy for Bitcoin mining. This is expected to attract more businesses and talent to El Salvador, creating job opportunities for locals, increasing tax revenue, and driving economic growth.

I’ve just instructed the president of @LaGeoSV (our state-owned geothermal electric company), to put up a plan to offer facilities for #Bitcoin mining with very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanos 🌋

This is going to evolve fast! 🇸🇻 pic.twitter.com/1316DV4YwT

— Nayib Bukele (@nayibbukele) June 9, 2021

Source: President Nayib Bukele’s twitter, using volcanic geothermal energy to promote Bitcoin mining

4. Reducing Dependency on Foreign Central Bank Decisions

El Salvador has been using the US dollar as its legal tender since 2001, subjecting its monetary policy to the Federal Reserve, putting the government and economy in a passive position. By adopting Bitcoin as El Salvador's second legal tender, it will help reduce dependency on decisions made by foreign central banks.

Three Major Concerns of Adopting Bitcoin as Legal Tender

1. Political Turmoil and Lack of Governance Experience

Located in northern Central America, El Salvador has a history of prolonged political and economic turmoil, with frequent political upheavals and dictatorships, earning its reputation as one of the most dangerous countries in the world. Despite President Nayib Bukele's urgent call for reform at the age of 39, his administration has faced negative evaluations, including corruption scandals within his team, concerns about the authoritarian nature of the Bitcoin law, ill-considered geothermal mining policies, lack of governance experience, all posing potential risks.

2. External Skepticism as Bitcoin Lacks Support from Major Financial Institutions

The IMF and World Bank have expressed reservations, potentially affecting the Bitcoin law and the $1 billion loan program. Rohan Grey, an expert from the Digital Currency Global Initiative, stated in a BBC interview that countries adopting cryptocurrencies as legal tender would give an unstable internet significant control, lacking accountable actors or records to prove the stability and liquidity that a legal tender should possess.

Furthermore, concerns about Bitcoin's price volatility and anti-money laundering measures remain focal points. Despite El Salvador's plan to establish a $150 million Bitcoin trust fund to provide stable USD-to-Bitcoin exchange rate guarantees, it remains a significant challenge in an unsound financial system.

3. Inadequate Infrastructure and Lack of Public Confidence

According to the DIGITAL 2021 report by DataReportal, El Salvador's internet penetration rate is only 50.5%, with nearly 70% of the population lacking bank accounts, reflecting inadequate financial infrastructure. Adopting Bitcoin as legal tender will test El Salvador's ability to execute financial infrastructure and also require citizens to have sufficient knowledge about Bitcoin, a factor the administration needs to consider.

Carlos Miguel Rivas Carrillo, a lawyer from the Financial Technology Association in the capital city of San Salvador, stated in a CoinDesk report that El Salvador faces significant challenges as we have not met the basic requirements to allow everyone to use this technology. Local students also expressed unfamiliarity with the use of laptops and phones, let alone the utilization of cryptocurrencies.

Commentary

It is understandable that countries like El Salvador and other Latin American nations are adopting Bitcoin as legal tender because Bitcoin not only offers convenient payment channels and low transaction fees but also addresses inflation concerns due to its limited supply.

However, El Salvador's Bitcoin law may face challenges in the short to medium term, with one significant reason being opposition from major financial institutions and the potential threat to the US dollar as the world's reserve currency. The spark could ignite a fire, as several political figures in Latin America have expressed interest in Bitcoin, hoping to adopt it as legal tender. Therefore, the law is likely to face pressure from the US government and financial institutions.

Another issue is internal to El Salvador, with the opposition party claiming the law is unconstitutional, and 80% of citizens disapproving of Bitcoin payments. Faced with internal and external challenges, as well as political instability, the law's potential overturn in the short term is not out of the question.

Nevertheless, El Salvador's move to adopt Bitcoin as legal tender remains a significant moment in history, and it bodes well for the long-term development of the cryptocurrency and blockchain industry. Enterprises and talents restricted by regulations are expected to flow into El Salvador and other Latin American countries for development. Perhaps through this opportunity, the widespread application of blockchain technology will take a leap forward.

This article is authorized for reposting from Block Chain-Innovation / Blockchain Innovative Applications