In a world-first, El Salvador makes bitcoin legal tender

(Reuters) – El Salvador became the first country in the world to adopt Bitcoin as legal tender after Congress approved President Nayib Bukele’s proposal to introduce the cryptocurrency.

With 62 votes out of 84 possible, despite concerns about the potential impact on El Salvador’s program with the International Monetary Fund, legislators voted for the move to enact Bitcoin law.

Touted the use of Bitcoin because of its potential to help overseas Salvadorans send money transfers home, Bukele said the U.S. dollar will continue to be legal tender.

President of El Salvador wants Bitcoin as legal tender

“It will bring financial inclusion, investment, tourism, innovation and economic development to our country,” said Bukele in a tweet shortly before the vote in Congress, which is controlled by his party and allies.

The use of Bitcoin will be optional for individuals and not pose any risks to users, Bukele said, with the government guaranteeing convertibility to dollars at the time of the transaction through a trust set up at the country’s development bank BANDESAL.

According to the law, Bitcoin must be accepted by companies if it is offered as a means of payment for goods and services. Tax contributions can also be paid in cryptocurrency.

Its use as legal tender will begin in 90 days with the Bitcoin-dollar exchange rate set by the market.

Proponents of cryptocurrencies welcomed the move as legitimizing the emerging asset, but its impact on Bitcoin regulation, taxation, or adoption in other countries remains to be seen.

Still, there was no immediate indication that other countries would follow El Salvador’s adoption of Bitcoin.

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“Whether this will be the first in a trend and then snowballs or if this will be a slip, we will only know through history,” said Brandon Thomas, partner at the Grayline Group consulting firm.

Analysts have also said the move could complicate talks with the IMF, where El Salvador is targeting a more than $ 1 billion program.

Bitcoin enjoyed its best day in two weeks, climbing up to 6% to $ 35,200.

“The market will now focus on the rollout by El Salvador and whether other nations follow suit,” said Richard Galvin of crypto fund Digital Asset Capital Management. “This could be an important catalyst for Bitcoin in the next two to three years.”

Emerging markets, where banking penetration is much lower than in developed countries and reliance on foreign money transfers is much higher, have quickly warmed to cryptocurrencies.

Outside of the United States, the countries with the highest volumes of crypto production and trade are all developing countries, including China, Colombia, and India, according to BofA.

However, the use of digital currencies in general can also pose risks to dollarized economies that have adopted foreign currencies as legal tender, such as El Salvador, she added.

Dollarization “is a major problem for macro and financial stability in many emerging countries and could get worse if digitization makes it easier to access foreign currencies,” said David Hauner from BofA.

“The main cause of dollarization is high local inflation, which could also worsen if digital currencies prove inflationary.”

El Salvador is heavily reliant on money that is sent back by foreign workers. World Bank data showed that remittances to the country amounted to nearly $ 6 billion, or about a fifth of GDP, in 2019, one of the highest rates in the world.

It is not clear what proportion of the transfers to El Salvador are in the form of Bitcoin.

The cryptocurrency theoretically offers a quick and inexpensive way to send money across borders without relying on the remittance companies that are normally used for such transactions.

But that has worried financial regulators and policy makers, who warn that Bitcoin is facilitating money laundering and other illicit uses.

However, its use for transfers is sketchy. Conversion of local currencies to and from Bitcoin often relies on informal brokers, while trading often requires technical knowledge.

According to Bukele, around 70% of the people in El Salvador do not have access to traditional financial services.

El Salvador will promote training and mechanisms to enable access to Bitcoin transactions, the law says.

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