El Salvador: The first country to use cryptocurrency as legal tender.
As of September 7, El Salvador became the first country to adopt bitcoin as legal tender, in a move that has caused the nation and many other countries to debate the opportunities and dangers of cryptocurrencies.
As of Tuesday, Salvadoran companies and businesses are required, as far as possible, to accept the controversial digital currencies as a form of payment.
The acceptance of the new currency comes three months after the Legislative Assembly approved in an express format the so-called Bitcoin Law, which went ahead thanks to the vote in favor of 62 of the 84 deputies who make up the parliament, a ruling majority.
To encourage its use in a country where most of the population does not have access to the Internet, the government invites Salvadorans to download a new digital wallet application that gives away US$30 in bitcoins to all citizens.
El Salvador's President Nayib Bukele announced on Twitter that his country bought the first 200 bitcoins and was working to buy more "as the deadline approaches."
The government has presented the measure to boost economic development and employment and benefit those who send remittances.
However, polls suggest that Salvadorans are not prepared for this, and international bodies such as the World Bank and the International Monetary Fund have warned against its adoption.
Critics say the change is more of an "attention-seeking move" and a "distraction" from an "authoritarian regime."
Over the weekend, El Salvador's Constitutional Court made a questionable interpretation of the Constitution to approve consecutive presidential reelection, which most academics agree is not legal.
And next week, the parliament plans to discuss a constitutional reform also promoted by Bukele that would give more power to the executive branch.
What is the new law in El Salvador about?
In June, the Salvadoran Parliament approved the legalization of cryptocurrency as legal tender.
Specifically, it establishes that the use of the virtual currency will be "unrestricted, with liberatory and unlimited power in any transaction and under any title that natural or legal persons, public or private, may wish to carry out."
The exchange rate between bitcoin and the dollar will be set "freely by the market" and not subject to capital gains taxes, just like any other legal tender.
As of Tuesday, all economic agents must accept bitcoin as a form of payment "when it is offered by the person acquiring a good or service."
The government has pledged to create the necessary institutional structure for the circulation of cryptocurrency. It has begun the installation of about 200 ATMs where bitcoin can be converted to dollars, although experts point out that this alone will not be enough for the change going forward.
Why is it a milestone?
No country in the world had dared to declare cryptocurrencies as legal tender before.
In Japan, one of the world's most advanced countries in the use of digital currencies, a 2017 legal reform made bitcoin a form of payment, which some interpreted as giving it legal tender status.
However, a report published in 2018 by Japan's Central Bank clarified that cryptocurrencies "are not legal tender and their use for payments depends on the willingness of the counterparty to accept them."
Hence, it has attracted international attention that El Salvador, a small country with a modest economy, was the first to take this step, announced and approved in record time with little debate.
The move comes at the same time that many governments worldwide, such as China, are going in the opposite direction and attempting to restrict the adoption of cryptocurrencies with increased regulations.
What are the risks?
The main criticism of the project is undoubtedly the high volatility that characterizes bitcoin.
The cryptocurrency went from costing around US$10,000 in September 2020 to a high of US$63,000 in April 2021 and then fell to US$30,000 in July this year. It is currently hovering around US$52,000.
It is feared that this significant fluctuation could encourage speculative attacks that could lead to chaos in the Salvadoran monetary system and thus affect the value of savings, pensions or salaries.
To prevent the population's purchasing power from being compromised, the government announced the creation of a US$150 million trust fund at the country's Development Bank to automatically exchange the bitcoins of Salvadorans who wish to do so.
Thus, Bukele gave as an example that if a fruit seller does not want to assume the risk of fluctuation and decides to change the bitcoins she receives from her work into dollars, this government-owned bank will buy them from her at the price at which she valued her fruit, regardless of whether the value changed from the time she made her sale until she deposited the cryptocurrency in the bank.
However, some economists believe that this does not mean that the government will assume the exchange rate risk, given that it is financed by taxes, which implies, they say, that it will be the entire population, particularly the poorest, who will bear the risk.
What benefits can it bring?
Among the main advantages pointed out by the advocates of this initiative is that thanks to bitcoin transactions, the population could save the commissions of intermediaries in the remittances they receive from abroad, which can amount to up to 30% of the money sent, according to Bukele.
The president said that the change would also lead to job creation and increased investment.
Remittances are a vital support for the Salvadoran economy, accounting for about 16% of its Gross Domestic Product (GDP).
Despite the pandemic, the country received nearly $6 billion last year from its emigrants, about 2.5 million living in the United States.
Given the fluctuating value of bitcoin and the commissions that have to be paid to some apps to buy it, some critics have pointed out that the money that the exchange houses and shipping agencies were keeping will now go to the tech companies.
Dangerous experiment
The German business daily Handelsblatt points out: "The digital currency promises, according to its supporters, not only greater independence from centralized bodies than other alternatives, but also the possibility of freedom from state authorities, banks and other institutions involved in transactions, which profit from business between individuals by charging fees. People who are marginalized from the conventional system, for example because they do not have a bank account for political or bureaucratic reasons, should also have access to a financial system...
(However), hundreds of workers and retirees protested in San Salvador against the cryptocurrency. 'Bukele, we don't want bitcoin' or 'No to money laundering', said the banners. Especially pensioners fear that in the future their pensions will be paid only with the cryptocurrency. A crash like the one at the end of 2017 would endanger their livelihood. (...) A glance at the past makes this clear: whoever bought a bitcoin for ten cents at the end of 2010, had in December 2017 a cryptofortune of about $20,000. Then the market imploded and, in the space of a few months, bitcoin fell to around $3,000. Critics argue, therefore, that the high volatility of cryptocurrencies can lead precisely those in developing countries to lose their livelihood bases.
What do Salvadorans think?
A Universidad Centroamericana (UCA) survey found that only 4.8% of the 1,281 respondents understood what bitcoin is and how it is used.
More than 68% of respondents said they disagreed with the use of cryptocurrencies as legal tender.
The opposition deputy Rodrigo Avila has pointed out that bitcoin is "a volatile monetary mechanism and its use generates a serious situation if the appropriate measures are not taken." The deputy said that "several" countries have banned the use of cryptocurrencies, especially bitcoin, and "others" have warned about the specific use of bitcoin, adding that bitcoin "is allowed in several countries but has not been officialized as legal tender, which is being done here without further analysis or due discussion".