Bitcoin Is Now Legal Tender in El Salvador. What Does This Mean for the Country and the Currency?
The central American country of El Salvador is the first nation in the world to accept Bitcoin as an official means of payment. Let’s take a look at what may have been behind this decision, and consider whether adopting an extremely volatile cryptocurrency will turn out to be positive for the state.
The History
On January 1st, 2001, El Salvador ditched the Salvadoran Colón in favor of the US dollar. In a move designed to bolster foreign direct investment, the decision didn’t deliver the dramatic results desired. Perhaps this came down to other factors, including corruption and institutional instability, but El Salvador clearly sacrificed its ability to manage its own monetary policy in adopting the US dollar.
What’s Behind the Decision?
El Salvador’s President, Nayib Bukele, heralded the adoption of Bitcoin as a major breakthrough for tourism and social inclusion. However, it is likely that another factor weighted on the decision:
The economy of El Salvador is heavily dependent on remittances sent from its migrant workers living in North America. These transactions make up around 20% of the country’s GDP. With such a large number of micro-payments flowing into the country, the percentage of income being lost to bank transfer fees is potentially enormous, even if there is no currency conversion taking place. Crypto-wallets using Bitcoin offer far lower transaction fees than cash-based services such as banks. By moving a portion of remittance payments over to crypto, El Salvador hopes to salvage a cut of the money currently being lost to big banks.
In Practice
As a legal tender, businesses in El Salvador will now have to accept Bitcoin as a means of payment for any transaction. This extends to the state, which will accept tax payments in Bitcoin too. Tech savvy President Bukele is a former marketing executive, and one must consider that, if anything, this news has been a major PR coup for the country.
Analysts are cautious in their comments because it’s a debut on the world’s stage. As there is no precedent, there is no clarity on how the situation may turn for El Salvador and the global financial system.
And What About Bitcoin?
How has Bitcoin reacted to its elevated status on the world stage? Surely formal recognition as a currency would have a positive impact on its price? Well, Bitcoin did see a modest jump of 5% on the announcement; however, given that the volatile crypto has been known to shift as much as 30% in a single session, this is hardly remarkable.
The Sign of Things to Come?
One must not forget that El Salvador is a developing nation facing a number of economic woes. The country is in an ongoing dialogue with the IMF to secure loans of last resort. While citizens of El Salvador may benefit from the money saved in transaction fees on their remittances, and the country has gained global attention for being a first mover — it may be a while before other nations copy the El Salvadorian model. That said, although Bitcoin has been bearish of late, crypto is not going away any time soon!
