What Happened: El Salvador has become the first country to adopt Bitcoin as a legal tender. Lawmakers voted in favor of Bitcoin, with a supermajority of 62 out of 84 lawmakers supporting the law. Now prices can be shown in Bitcoin, taxes can be paid with the digital currency, and currency exchanges with Bitcoin will not be subject to a capital gains tax.
“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.
However, many questions have been raised by the public in regards to Bitcoin’s volatility. With a coin that can fluctuate with such drastic price swings, it is unclear how El Salvador will ultimately introduce bitcoin as a legal tender or if it can be suitable enough to last as an effective currency. El Salvador’s current official currency is the U.S dollar, so the government will allow the free market to establish the exchange rate. The law also says that the state will “promote the necessary training and mechanisms so that the population can access bitcoin transactions.” According to the Bitcoin Law, approximately 70% of El Salvador does not have access to traditional financial services, using cash instead of credit or debit cards for transactions. In addition, around 20% of El Salvador’s gross domestic product comes from money sent from immigrants abroad. Having Bitcoin as a financial option could be seen as a way to increase inclusion in the free market; however, only 33% of the country has access to the internet, according to World Bank Data. This number is deficient compared to other third-world countries, and modern infrastructure is needed to catch up with the world average.
El Salvador is not executing this enterprise alone. Earlier this month, a partnership was struck with the digital wallet company Strike to help build the companies financial and technological infrastructure to be compatible with Bitcoin.
My Analysis: Bitcoin has never been backed by a physical asset, nor does it have any backing from any government. Its value is only derived because it digitally scares with only 21 million bitcoins in existence. With El Salvador being the first country to back Bitcoin, it will be extremely interesting to see if their experiment will work out. El Salvador’s venture isn’t as risky as it would be for any other developed nation as it does not have its own currency, it relies on the US dollar. However, having two legal tenders will complicate El Salvador’s finances immensely, especially when one of its tenders has wild swings in value. Until further regulations are made, it is too hard to tell how El Salvador’s bitcoin plan will look. Many questions would have to be answered. For instance, how would El Salvador determine how much bitcoin is necessary to pay off a debt? Will it be based on the Bitcoin price when the debt was incurred or when it is due? A difference of even a couple of days could be significant. If Bitcoin is expected to rise, why would anyone want to use it? If Bitcoin is expected to fall, why should I accept the currency if it will be worth less tomorrow? Until those questions can be answered, I will always consider this experiment an awful Idea, but only time will tell if this venture would be worthwhile to replicate in other countries.