Bitcoin: A Legal Tender

On 7th September 2021, the novel law authorizing Bitcoin as a legal tender in El Salvador came into force, completely changing the way digital currencies would be viewed now and in the future. Businesses from supermarkets to hairdressers and even restaurants will now have to accept Bitcoin as it becomes a legal tender in El Salvador. Furthermore, the government bought around 400 coins worth $21 million.

Bitcoin was created in 2008 by Satoshi Nakamoto, a pseudonymous personality. The Bitcoin software was made public in the year 2009, and soon in 2011, new cryptocurrencies began emerging in the market. According to CoinMarketCap, there are currently more than 11,000 cryptocurrencies prevalent. Soon in 2015, Bitcoin’s value rose to $1000 with its popularity rising that in 2017 its value got close to $10,000. However, at the beginning of 2018 bitcoin crashed again, losing 80% of its value as many countries started taking steps to regulate or even eliminate cryptocurrencies. Finally in 2020, with the pandemic and world in lockdown, the crypto market started gaining traction, and Bitcoin’s price soon made a recovery. Although bitcoin crashed again in May 2021, after the tech tycoon Elon Musk publicly took away his support for the coin, it has now recovered to the same extent. As it can be seen, every time bitcoin has fallen, it has recovered its value.

Bitcoin is now a legal tender

The government of El Salvador dedicated $203 million in public money for its Bitcoin plan, out of which $150 million were designated to facilitate conversions from Bitcoin to USD. Further $23.3 million were used for financing the rollout and $30 million had been set aside for providing a $30 bonus to the new users of the Chivo Digital Wallet app. The Chivo Digitial Wallet was created to facilitate the use of Bitcoin. Every new user of the app, who registered themselves on the app received $30 worth of Bitcoin. The government has installed 200 “Bitcoin ATMs” all over the country for people to exchange their bitcoins for dollars. International chains like Starbucks and Pizza Hut would start payments in bitcoin in the country.

The revolutionary move of designating Bitcoin as a legal tender in addition to USD has invited mixed feelings from the citizens of El Salvador. In a poll conducted by the Central American University, out of 1,281 people:

  • 80% had no confidence in Bitcoin
  • Almost 68% of the population surveyed is opposed to making Bitcoin a legal tender
  • 2/3rd of the population has no interest in downloading the Chivo Wallet app.

Despite the majority of citizens not supporting the new law, the introduction of Bitcoin as a legal tender proposes certain benefits, including:

  • Boosting financial inclusion as 70% of the population of El Salvador is currently unbanked. The inclusion of Bitcoin would also mean the inclusion of the unbanked population, as participation in digital currency does not require a financial institution but only a smartphone, which in today’s era, is easily accessible to all.
  • 24% of El Salvador’s Gross Domestic Product (GDP) depends on remittances, ie, money sent from citizens who migrated to foreign countries. The remittances invite huge commission fees. The new bitcoin law reduced the commission fee for crucial remittances, and in a statement made by Bukele, the current president of El Salvador, this move would help save around $400 million a year by simply reducing the commission fee.
  • The law allows prices to be displayed in Bitcoin, facilitating ease in using it without having to worry about conversions.
  • Transactions made in bitcoin would not be subject to capital tax gains as it would not be treated as a security or property but money.

Associated risks

There are no rewards without risks. Thus, to gain the full advantage of Bitcoin being designated as a legal tender, there are a few risks associated with it:

  • The highly volatile nature of Bitcoin makes it difficult to have a fixed exchange rate of the coin.
  • The changing rate could potentially impact inflation causing a rise in prices.
  • The world bank refused to assist El Salvador in adopting bitcoin as a currency. They cited ‘environmental and transparency shortcomings’ as reasons for the refusal of their request.
  • Bitcoin is ‘mined’ by solving complex mathematical puzzles using powerful computers that consume high levels of energy. The environmental impact of cryptocurrencies has recently been up for debate in the community.
  • Bitcoin is also criticized for being able to be used for illegal activity, particularly, for money laundering and financing terrorism.

Due to these risks and uncertainties among citizens, many moved to the streets to protest against this move made by the government.

Bitcoin Beach

While on one hand the majority of the population is protesting against Bitcoin, there is a small town in El Salvador rejoicing for the same. The beach town of El Zonte, known to be a surfers hub, is now part of this initiative called Bitcoin Beach, which aims to develop a bitcoin ecosystem in areas where people do not have access to bank accounts. Tourists and residents, especially local business owners now depend heavily on bitcoin for their day-to-day transactions, including receiving salaries in bitcoins and paying in bitcoins. Having little to no financial institutions around, the residents of this town have been happily using bitcoin as a means of financial transactions daily since 2019. It is being used as a means of exchange in the village through various initiatives that involve using the digital currency in real transactions.

This unprecedented move by El Salvador has inspired other countries to accept and integrate bitcoin into their economies as well. Panama’s Congressman Gabriel Silva announced a new bill titled “Crypto Law: Making Panama Compatible with the digital economy, blockchain, crypto assets, and the internet”, which aims to provide ‘legal, regulatory and fiscal certainty to use, hold and issue digital currencies’ within the Republic of Panama.

Furthermore, Ukraine has widened its acceptance of digital currencies by legalizing the use of Bitcoin in the country. The new law regulates cryptocurrencies and provides security measures for its users. These developments and their progression shall bring about an unprecedented change in the essence of the crypto world as it exists in the present scenario. What has started as a minor transition brought about by these nations will henceforth unfold into a global situation which can have an everlasting effect on how decentralized finance is viewed in the forthcoming days. As countries often allow the legal tenders of other domestic nations to be included in their definition of ‘money’, such as under the United States’ Uniform Commercial Code (U.C.C), it could pose some unique legal challenges in the continued classification of Bitcoin as an asset. The successful adoption of Bitcoin as a legal tender by one country will undoubtedly influence more nations to charter into these unexplored horizons.

Conclusion

In the previous decade, Bitcoin started the cryptocurrency revolution. This decade began with a new development in the field of cryptocurrency with El Salvador introducing the first of its kind legislation. This is an indication of how the world is developing and becoming more adaptable to digital currencies. The new El Salvadoran law mandates that businesses accept Bitcoin as payment for goods and services, wherever applicable, thus building an economy based on bitcoin.

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