El Salvador to adopt Bitcoin as legal tender in the country, becoming the first in the world to officially embrace volatilityas such.
The Latin American country’s congress overwhelmingly voted in favor of the law on Tuesday evening, pushing Salvadorian President Nayib Bukele’s proposal forward. The 39-year-old politician’s party holds a qualified majority in El Salvador’s congress.
“This will bring financial inclusion, investment, tourism, innovation and economic development for our country”, Bukele said before the vote.
According to experts, this move also carries financial risks for ordinary Salvadorans and their country, as the cryptocurrency gains and loses huge amounts of value in a flash – and sometimes overnight.
The US dollar is the country’s official currency, and El Salvador’s economy is heavily dependent on money returned from overseas. According to World Bank data, these so-called remittances to the country amounted to nearly $ 6 billion, or nearly 20% of its gross domestic product in 2019.
On Sunday, Bukele tweeted that a “big piece” of that $ 6 billion is lost to intermediaries who take part in financial transactions in dollars. Instead, he thinks Bitcoin could be “the fastest growing way to transfer $ 6 billion a year in remittances.” According to the president, 70% of the Salvadoran population does not have access to traditional financial services. Buekele said Bitcoin could improve financial inclusion and access to wealth in a desperately poor country.
How it works?
Bitcoin, as legal tender, can be used in any transaction and businesses will need to accept this form of payment, depending on the legislation. The law also states that tax contributions can be paid via Bitcoin and that trading in the cryptocurrency will not be subject to capital gains tax.
Under the new law, El Salvador “will promote the training and mechanisms necessary for the population to access bitcoin transactions.” However, those who do not have access to technologies that can make bitcoin are excluded from the obligation to accept it as a means of payment.
Bitcoin can be used as legal tender when the law goes into effect in 90 days. The bitcoin-dollar exchange rate will be set by the market.
Impact of the first country to adopt Bitcoin
El Salvador becoming the first to have bitcoin as legal tender could be a sign of things to come for cryptocurrency. Greg King, CEO and founder of Osprey Funds, a crypto asset management company, told CBS News that having Bitcoin as legal tender is “big business.”
“I think this is a major milestone for Bitcoin and a very positive development,” he said. “It remains to be seen how many adoptions will be adopted by their citizens. But qualitatively, what it does for Bitcoin further legitimizes its status as a potential reserve asset for sovereign and super sovereign entities. ”
Meanwhile, El Salvador is one of the poorest countries in the region, and Bukele is looking for a billion dollar program with the International Monetary Fund.
Siobhan Morden, managing director and head of Latin America fixed income strategy at Amherst Pierpont Securities, told CBS News he was “very early” in assessing the implications for having Bitcoin as legal tender in El Salvador and how it will work.
“It was a very sudden announcement,” she said. “It was adopted quite quickly. And so, it really raises concerns about how effectively this is going to be carried out and what the implications are for the country, especially in terms of relations with its diplomatic and multilateral relations. . ”
The fear for El Salvador – besides the sharp swings in the value of bitcoin to ordinary people – is that it could delay ongoing negotiations with the IMF, Morden said.
“El Salvador is a dollarized economy and has limited access to financing its budget deficit for its funding programs. And it has really reached a level of saturation, in terms of issuance in its own local markets,” he said. she declared. “So its ability to access credit depends on reaching an agreement with the IMF, which can facilitate access to multinational loans. ”