El Salvador has become the first country to adopt bitcoin as legal tender. Officials in the Salvadoran congress voted in a “supermajority” of 62 out of 84 votes. This fulfills president Nayib Bukele’s promise to make bitcoin legal tender alongside the US dollar.
“The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out,” the law reads. Furthermore, the law enables prices to be shown in bitcoin. Taxes can now be paid in bitcoin, and exchanges in bitcoin are exempt from capital gains tax. The government will also be partnering with digital wallet firm Strike to provide an easy and simple to use financial framework based around the cryptocurrency. Jack Mallers, founder of strike, claims that adopting bitcoin could help countries like El Salvador avoid some of the pitfalls of traditional fiat currency, such as excessive hyperinflation, that developing economies are sometimes prone to.
This decision is unprecedented, as no country has yet made a cryptocurrency an official legal tender. However, Bitcoin is prone to wild price swings and extreme volatility, as is the case with most cryptocurrencies. One such example of this volatility occurred over the past few months. In mid-April, Bitcoin reached its all time high of $64,829.14, but has since been cut nearly in half, falling to close to $30,000 in late May, including a 30% drop in one day. However, it is still up 230% in the last 12 months, prompting interest from large institutional investors, such as American tech giants Square and Telsa, Inc. Critics of the El Salvadoran government’s move, and of cryptocurrency in general, say this volatility makes it too risky to be used as an official currency. However, its supply capped at 21 million and its easy accessibility – investors can access bitcoin wallets on their smartphones and other devices- has prompted enthusiasts, namely famed value investor Bill Miller, to call it “digital gold”.
Its use in El Salvador has more applications than simply a store of value or an alternate currency. Currently, about 70% of El Salvadorans do not have access to traditional financial services, according to the law. The government is hopeful the Bitcoin law, and the Strike mobile wallet will help to increase financial inclusion among the citizens of El Salvador. Furthermore, remittances, or money sent home from migrants, accounts for 20% of El Salvador’s GDP. Current financial services charge fees of up to 10% on these payments and sometimes take days to arrive. But since bitcoin is decentralized, it can be sent anywhere in the world instantly via the internet, meaning that these payments can be made instantaneously and without any third-party fees.