On June 9, 2021, the parliament of El Salvador passed a legislation proposed by the country’s president – Nayib Bukele. The proposal involved making Bitcoin, the world’s largest cryptocurrency, legal tender in El Salvador. The law took effect recently, and reactions to it around the world were mixed to say the least.
On one hand, there were crypto advocates who weren’t shy of showing their support for El Salvador’s president. On the other, critics warned of dire consequences.
While the long-term fallout of this breakthrough decision can only be speculated, it would be worthwhile to understand why President Bukele wanted to legalize Bitcoin in the first place.
In this post, we’ll share with you all the reasons that Bitcoin became legal tender in El Salvador. We’ll also take a look at what the consequences might be, both in the short and long terms.
photo credit: Olhar Digital
The Reasons
Three important reasons formed the basis of President Bukele’s decision – the country’s poor economic growth, the people’s dependence on migrants for money, and the lack of bank accounts.
Let’s take a deeper dive into all these reasons in this section:
1. Poor Economic Growth
El Salvador’s economy in recent years has been in a state of shambles. As a result, poverty is widespread around the country, which has made the country a hotbed of crime.
Through the legalization of Bitcoin, the government plans on boosting the country’s economy and taking it out of the muddy waters that it currently sees itself stuck in.
2. People’s Dependence on Migrants for Money
A whopping 23% of El Salvador’s GDP is generated from migrants from the country who have taken opportunities abroad. Migrants send back a portion of the money they earn abroad to El Salvador in the form of remittances. The total money that El Salvador receives provides economic benefits to more than 350,000 households. However, the process of sending remittances through conventional means was an inefficient and expensive one.
Through Bitcoin legalization, the government aims to make this process efficient and inexpensive, which will allow more money to flow into the country.
3. Lack of Bank Accounts
A digital finance company called Strike helped the government with the logistics to make the proposed legislation a reality. The company’s CEO, in an interview with CNN, said that the majority of the active population of El Salvador are without bank accounts. Legalizing Bitcoin would allow this majority to access banking services without the need for opening bank accounts.
The government has also installed and set up Bitcoin ATMs throughout the country. These ATMs would allow people to convert Bitcoin to USD and vice versa.
The Challenges
On the surface, the intentions of the El Salvador government seem pro-people. However, adopting a cryptocurrency as legal tender comes with many challenges.
1. Price Volatility
For starters, cryptocurrencies are incredibly volatile financial entities, whose values fluctuate frequently. Many critics suggest that this volatility makes Bitcoin and other cryptocurrencies risky investments that are purely based on speculation.
2. Will People Actually Use it for Payments Regularly?
Even though the government is encouraging Bitcoin adoption throughout the country, it’s difficult to predict how many people will actively use it for regular payments. For example, if there are predictions regarding an upcoming surge in Bitcoin prices, would anyone want to spend it for buying regular things? Similarly, if Bitcoin prices are set to fall, would anyone take the chance of accepting it? Debt payments through Bitcoin also remain shrouded in mystery. Will a debt’s Bitcoin price be decided based on when it was incurred, or when it’s due?
All these uncertainties, coupled with the fact that the country already had a legal currency (USD), make the future of El Salvador’s economy dicey. To complicate matters, the majority of the country’s people still aren’t aware of what cryptocurrencies are and how they work. In this situation, it’s likely that the USD will remain the firm favorite for the time being.
3. Rising Tax Evasion and Greater Black Market Activities
There’s also the risk of tax evasion and greater black market activities. After all, Bitcoin transactions are all decentralized, and can’t be traced. So, it would be interesting to see what steps President Bukele and his government take to reduce the risks associated with Bitcoin use.
What Do You Think?
The already-impoverished Central American nation is in for a roller-coaster ride in the days to come, and there are fears that its economy will be destabilized due to the legalization of Bitcoin.
Now over to you – what do you think of the pros and cons of Bitcoin legalization in El Salvador?
Cover photo credit: Motherboard / YouTube
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