El Salvador will adopt Bitcoin as legal tender in the country, becoming the first in the world to formally embrace the volatile. cryptocurrency as such.
The Latin American country’s congress overwhelmingly voted in favor of the law Tuesday night, pushing forward Salvadoran President Nayib Bukele’s proposal. proposal. The 39-year-old politician’s party has a supermajority in El Salvador’s Congress.
– MIRA: Congress of El Salvador explodes in applause after bill signed by the president @nayibbukele officially passes, becoming the first country in the world to do #bitcoin a legal tender. pic.twitter.com/IZM7lCywmq – Belaaz (@TheBelaaz) June 9, 2021
“It will bring financial inclusion, investment, tourism, innovation and economic development for our country”, Bukele. Said before The vote.
The move also brings financial risks for ordinary Salvadorans and their country, experts say, as cryptocurrency gains and loses huge amounts of value in an instant, and sometimes overnight.
The US dollar is the official currency of the country and El Salvador’s economy is highly dependent on money sent from abroad. According to World Bank data, these so-called remittances to the country accounted for nearly $ 6 billion, or nearly 20% of its gross domestic product in 2019.
On Sunday, Bukele tweeted that a “big chunk” of that $ 6 billion is lost to intermediaries who take a share of financial transactions in dollars. Instead, he believes that Bitcoin could be “the fastest growing way to transfer six billion dollars a year in remittances.” According to the president, 70% of the population of El Salvador lacks access to traditional financial services. Buekele said Bitcoin could improve financial inclusion and access to wealth in a desperately poor nation.
How does it work?
Bitcoin, as legal tender, can be used in any transaction and companies must accept that form of payment, according to the legislation. The law also states that tax contributions can be paid through Bitcoin and exchanges in the cryptocurrency will not be subject to capital gains tax.
I just sent the #BitcoinLaw to Congress
pic.twitter.com/DljnxsXlyt – Nayib Bukele
(@nayibbukele) June 9, 2021
Under the new law, El Salvador “will promote the necessary training and mechanisms so that the population can access bitcoin transactions.” However, those who do not have access to technologies that can realize bitcoins are excluded from being obliged to accept it as payment.
Bitcoin can be used as legal tender when the law takes effect in 90 days. The bitcoin-dollar exchange rate will be set by the market.
Impact of the first country to adopt Bitcoin
The fact that El Salvador is the first to have bitcoin as legal tender could be a sign of things to come for the cryptocurrency. Greg King, CEO and founder of Osprey Funds, a crypto asset management company, told CBS News that having Bitcoin as legal tender is a “big deal.”
“I think it is an important milestone for Bitcoin and a very positive development,” he said. “It remains to be seen how much adoption its citizens will adopt. But only 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 poorer countries in the region, and Bukele is seeking a $ 1 billion program with the International Monetary Fund.
Siobhan Morden, Amherst Pierpont Securities managing director and head of Latin America fixed income strategy, told CBS News that it is “really early” in assessing the implications of having Bitcoin. as legal tender in El Salvador and how it will work.
“It was a very sudden announcement,” he said. “It was carried out quite quickly. So it really raises concerns about how effectively it will be executed and what the implications are for the country, especially in terms of its relations with its diplomatic and multilateral relations.”
El Salvador’s fear, in addition to abrupt swings in bitcoin values for 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 for its fiscal deficit for its financing programs. And it has really reached a saturation level, in terms of issuance in its own local markets,” he said. “So your ability to access credit depends on reaching an agreement with the IMF, so it can facilitate access to multinational loans.”