On June 9, the El Salvador legislative body officially voted in a bill adopting bitcoin as legal tender. Today, that law comes into force.
Almost 20 years ago, El Salvador adopted the US dollar amid ongoing economic woes in the Central American republic. Despite intending to bring stability, it ultimately hurt the lower economic strata of society most. At the time, much like the recent bitcoin protests, some felt that the decision was rushed without sufficient consultation or education of the broader populace.
In an interview in June, President Nayib Bukele provided some context behind the move, saying it was ultimately for the benefit of all Salvadorean citizens.
The purported benefits include:
- Receiving remittances at the speed of light with almost no costs, compared to the slower and more costly fee structures of Western Union and the like. Importantly, personal remittances account for almost a quarter of El Salvador’s GDP.
- Providing financial inclusion to the 70 percent of the population who remain unbanked.
- Becoming less dependent on the output of new US dollars and resultant inflation due to an unprecedented increase in the money supply; in short, El Salvador wants to take back some control of its monetary system as it derives no benefit from the increased supply of US dollars, only the downside.
- Increased levels of financial investment and the attraction of global talent, particularly when coupled with forthcoming residency-by-investment laws.
How Will It Work?
One of the more controversial elements of the newly enacted law is Article 7 which provides that from September 7, all businesses in El Salvador are required to accept bitcoin for the sale of goods and services. Despite this provision, President Bukele and Finance Minister Alejandro Zelaya have both declared that bitcoin will be “totally optional”.
The use of bitcoin will be optional. Nobody will receive bitcoin if they don’t want it […] If someone receives a payment in bitcoin, they can choose to automatically receive it in [US] dollars.President Nayib Bukele
To provide for those who do not wish to hold bitcoin and to otherwise manage its volatility, a US$150 million trust fund has been set up to instantly convert bitcoin to US dollars, effectively transferring the volatility risk to the trust. From time to time, the trust would replenish its US dollars through the sale of bitcoins.
If there’s an ice-cream parlour [and the owner] doesn’t really want to take the risk, he has to accept bitcoin because it’s a mandated currency but he doesn’t want to take the risk of convertibility, so he wants dollars deposited in his banking account and when he sells the ice cream, he can ask the government to exchange his bitcoin [for] dollars. Of course he can do that in the markets also but he can ask the government to do it immediately.President Nayib Bukele
To encourage widespread adoption, the country has installed more than 1,000 bitcoin ATMs and offered US$30 in bitcoin to citizens who download the government’s voluntary digital wallet.
As a signal of support, a three million-strong Reddit community in Brazil has pledged to purchase US$30 each on September 7, a day that happens to coincide with the country’s independence day.
Aside from the purported benefits to its citizens, El Salvador is also looking to become a leader in 100 percent eco-friendly “volcano” bitcoin mining, which promises to provide an economic windfall for the nation, generating up to 20,000 BTC per annum according to some estimates.
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