Bitcoin as Legal Tender – The El Salvador Test Case
Earlier this month, El Salvador became the first country to adopt Bitcoin as legal tender alongside the U.S. dollar. The controversial move to embrace cryptocurrency in this way was spearheaded by the country’s 39-year-old president Nayib Bukele and prompted by his hopes of it bringing “financial inclusion, investment, tourism, innovation and economic development for [the] country.”
In effect, this means that every business in El Salvador must accept Bitcoin as legal tender for goods or services – this is unless the business is unable to offer the technology needed to process the crypto transaction. It is anticipated that the move will make it easier for the two million Salvadoreans who live outside the country to send money back home. El Salvador's economy relies heavily on remittances, which make up approximately 20% of the country's gross domestic product (GDP). In real terms, this equates to around $4 billion (£2.8 billion) which is sent back to El Salvador each year. Many are optimistic that the adoption of Bitcoin will increase prosperity and financial options for lower-income citizens.
International Reaction
Whilst crypto enthusiasts revelled in the news from Central America, others have been notably more cautious.
It was not long after the move was announced that the International Monetary Fund (IMF) voiced its concerns and warned about the potential economic and legal risks of the unprecedented use of Bitcoin in such an economy. It promised it would be “following developments closely”.
The latest such development is that the World Bank has rejected El Salvador’s request for help on Bitcoin implementation, given the environmental and transparency shortcomings. El Salvador had sought technical assistance from the Bank. But it seems as though Bukele’s plan, which includes the mining of the country’s geothermal energy from volcanoes in order to power the vast data centres which are needed to produce the cryptocurrency, is cause for concern.
We have seen recently through comments made by Elon Musk that the process in which a Bitcoin is mined is a highly energy-intensive process – a fear shared by the World Bank. Although supporters of Bitcoin argue that any negative environmental costs caused by mining it are worth it for the potentially broader, positive effects it could have on society.
And so, as a result of the ongoing commentary and the decisions made by the IMF and World Bank, it could be that El Salvador will encounter obstacles in meeting its deadline to guarantee that Bitcoin is accepted nationwide within the next three months. The Congressional vote in El Salvador that approved the proposal for Bitcoin as an official currency was passed based on the roadmap that it would become legal tender within 90 days of the approval by Congress.
Commentary
There is no doubt that El Salvador’s plans to implement Bitcoin as a parallel legal tender are bold and innovative. It was only ever going to be a matter of time before this ground was tested. And it makes sense considering the flexibility that Bitcoin can offer this small, remittance-dominated emerging economy, where many are lacking access to traditional banking services. Such circumstances do make El Salvador a key candidate for being a pioneering crypto front-runner. However, it remains to be seen whether this announcement in El Salvador will have a broader impact on Bitcoin regulation and taxation - and whether there will be a snowball effect regarding the adoption of crypto in other countries. Certainly, there are currently no signs that any other countries are planning to follow in El Salvador's footsteps in adopting Bitcoin and/or any other crypto as expansively. It is likely that other such countries are tentatively watching to see how this “test case’’ develops.
