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Buying the Dip: El Salvador Makes Bitcoin Legal Tender

Categories : Cash does not require a technology infrastructure, Cash has legal tender status, Cash is the first step of financial inclusion, Cash is the most widely used payment instrument, Future of Cash
November 9, 2021
Tags : Cryptocurrency, El Salvador, Financial inclusion, Legal tender, Surveillance capitalism, Unbanked
El Salvador has become the first country to make bitcoin legal tender, hoping to increase financial inclusion. Critics fear it will become a vigilance tool for the government.
Manuel A. Bautista-González

Ph.D. in U.S. History, Columbia University in the City of New York

Post-Doctoral Researcher in Global Correspondent Banking, 1870-2000 – Mexico and South America, University of Oxford

This post is also available in: Spanish

Announcing a Historic Monetary Decision During a Bitcoin Conference

El Salvador has long been affected by insecurity and gang violence. After the Covid-19 pandemic, the country has dealt with an economic contraction, a large fiscal deficit, and a high debt burden. There are also increasing concerns about president Nayib Bukele’s dismantling of democratic institutions and fraught negotiations with the IMF for a $1.3 billion loan agreement.

The U.S. dollar has been El Salvador’s national currency since January 1, 2001. On June 6, 2021, President Bukele announced the country would adopt bitcoin as legal tender in a pre-recorded address in English for the Bitcoin 2021 conference in Miami.

Bukele’s decision caught Salvadorans by surprise. Until then, El Salvador’s main crypto experiment had been Bitcoin Beach, a pilot in the Pacific surf town of El Zonte. Some businesses accepted payments in crypto, and 2 ATMs allowed users to convert bitcoin to U.S. dollars. 

A Bitcoin Entrepreneur Writes the Bitcoin Law

Crypto evangelist Brock Pierce has been in contact with officers in the Bukele administration since June. Jack Mallers, founder of the bitcoin payment platform Strike, helped write the Bitcoin Law. The Salvadorean Assembly rubber-stamped the 3-page legislation on June 9, 2021

The Bitcoin Law mandates that “all economic agents must accept bitcoin as a means of payment” (art. 7) except for “those who have no access to the necessary technology” (art. 12). The law also establishes that “taxes cam be paid in bitcoin” (art. 4). However, the U.S. dollar remains the country’s “accounting reference unit” (art. 6). “Continuing to use USD as a parallel currency is sensible, especially as many Salvadoreans use physical cash, but it could delay business adoption of BTC [bitcoin],” tweeted banking and finance commentator Frances Coppola.

No Popular Buy-In

The law passed amid strident opposition:

There was barely any discussion about the law and its implementation:

Financial Exclusion in El Salvador

The Bukele administration argues that Bitcoin might help lower the cost of receiving remittances. In 2020, remittances reached 24.1% of El Salvador’s GDP. Kiara Hueso, a 27-year-old beauty products saleswoman, said it had been “easier and faster” to withdraw $75 sent by her father in the United States – after two days of trying.   

Douglas Rodriguez, president of the Reserve Bank of El Salvador, said, “We don’t see any risks [with bitcoin]. Perhaps, upside risks. [Bitcoin will] become a payment system, a system for financial inclusion […] For us, Bitcoin is simply a payment method.” 

In 2017, only 30.4% of Salvadoreans had a bank account. That year, only 18.9% of the population had a debit card, and 5.7% had a credit card. In 2019, nearly 22.8% of households lived below the poverty line. In 2020, 59% of adult Salvadoreans had internet access. However, more than 90% of rural households have no internet access, according to a 2020 report from the Interamerican Development Bank and Microsoft.

German Martínez, a 61-year-old Uber driver, said that Bitcoin is “like credit cards. We got used to using plastic, and now we need to start using crypto. The world has to evolve.” However, having a digital wallet is not an option for all.

B is for Bitcoin, B is for Bukele, B is for Big Brother

Critics are shocked by the Bitcoin community’s cavalier disregard concerning president Bukele’s authoritarianism and the potential misuse of the Chivo wallet for state surveillance and other nefarious purposes. 

This post is also available in: Spanish