El Salvador adopts Bitcoin as national tender – Here is exactly how massive this is
Latin America has been a consistant epicenter of cryptocurrency enthusiasm, ever since the inaugural days of Bitcoin a decade ago, when the President of Argentina decided to ban its 160,000 citizens who did not trust the government or local banks from keeping their funds in US Dollars in bank accounts north of the equator.
Cristina Kirchner, who was President of Argentina in the early years of the last decade, devised a number of plans to ensure that citizens of the country repatriated their dollars at a terrible exchange rate heavily weighted in favor of the Argentinian government for local Peso, which was subject to tremendous inflation to the extent that if anyone obeyed the draconian attempt at capital controls they would have eventually lost their money.
The result was that the combined banning of the use of US dollars in Argentina, the worthless promisory notes that were given in place for repatriating dollars and the ensuing capital control rules caused Bitcoin to rally in value to the point at which it was being sold in Argentina among groups of enthusiasts for up to 30% higher than its value in neigboring Uruguay, which had a much more liberal and stable economy.
Note the reference to local values – things have come a long way since then. Ironically, just a few years later in 2016, Ms Kirchner was indicted for money laundering and the rest is history.
A large number of enthusiasts gained momentum across Latin America and Bitcoin conferences were held in many cities in various nations within the continent, and today, that momentum has led to an extremely developed cryptocurrency ecosystem.
Just this afternoon, El Salvador, a nation of just under six and a half million people, has become the first country in the world to adopt cryotocurrency as legal tender.
This is a particularly interesting development when considering the country’s unusual international income structure.
El Salvador leads the entire region in remittances per capita, with inflows equivalent to nearly all export income; about a third of all households receive these financial inflows. Remittances from Salvadorans living and working in the United States, sent to family members in El Salvador, are a major source of foreign income and offset the substantial trade deficit of $4.12 billion and remittances have increased steadily in the last decade, having reached an all-time high of $3.32 billion in 2006 which was an increase of 17% over the previous year) which made up approximately 16.2% of GDP.
Therefore, having cryptocurrency as an official method of payment and settlement is well aligned with the nation’s borderless dynamic in terms of inflow and outflow of capital.
Whilst dissenters within the country are labelling the move as a blatant attempt at ‘political marketing’ by Salvadorian President Nayib Bukele, policy makers voted unanimously in favor of allowing the recognition of Bitcoin as a legal method of payment across the entire country, heralding the Premier’s rationale which centers around financial inclusion, investment and economic development.
In El Salvador, approximately 70% of citizens are unbanked, meaning they lack access to a basic bank account, therefore the adoption of Bitcoin as an official currency is a step toward getting the majority of the nation’s citizens past a massive hurdle, that being the ability to use currency in a digital format, store value and accrue wealth via digital wallets and cold storage, and be included in an economy of goods and services via the internet that they would otherwise be excluded from as well as participate in electronically received salary payments which could lead to better chances of employment in higher paid jobs.
The development of economies in which large sectors of the population are without a traditional bank account is a massive challenge and even today, many countries around the world face this issue. It is harder for governments to collect tax on revenues as unbanked populations often result in unofficial economies existing within nations, and the other side of the double edged sword means that citizens cannot find their way out of poverty, and social and commercial environments cannot modernize.
El Salvador’s ground breaking move today solves that issue for the majority of its citizens.
Whilst having a traditional bank account is rare among Salvadorians, use of mobile banking applications is even less common. Between 2014 and now, only 4% of the entire country’s population use mobile banking services, restricting the development of contactless payment systems and slowing down the daily life of its citizens by making them use paper or line up to exchange money for goods rather than be able to send money to and from relatives, pay for services over the phone or receive income from trade on-the-fly without having to waste time.
Real-time is the only way these days, and Bitcoin usage will likely lead to that for many.
Following today’s ruling, Bitcoin will be rolled out legally in El Salvador in 90 days from now and will be official tender alongside the US Dollar. The bitcoin/dollar exchange rate will be set by the market, and Salvadorians will be able to pay their taxes in Bitcoin and “every economic agent” will be required to accept the cryptocurrency as payment unless they lack access to the necessary technology.
President Bukele also expects that Bitcoin could make it easier for Salvadorians living abroad to send home the remittances which amounted to $6bn in 2019 – a fifth of the country’s GDP, a massive advantage alongside the immediate inclusion within a modern economy that 70% of its citizens will benefit from.
There is of course always some dissent, and this time it comes, once again rather ironically, from a Human Rights group. It would be perhaps a given to think that any organization with an interest in Human Rights would welcome this move as it empowers the previously disempowered, but in the case of David Morales of the Cristosol human rights group, it is a political move.
“It was an idea that occurred to the president and became law within hours,” he said. “This kind of important decision is made as part of a marketing strategy, instead of having a real national debate” he said.
Others who don’t share the same level of jubilation as the proponents are academics who consider the volatility of Bitcoin to be a potential risk to members of the public who will rely solely on Bitcoin for their access to organized financial markets and a national economic system. For example, one day they receive their wages, someone tweets, wages either rocket in value or become worthless, then rocket again and so forth.
There must be some absolute genius, however, because former US President Donald Trump ranted on Fox News yesterday, showing his disdain for cryptocurrencies, which was reflected in the downturn in their values yesterday. Some analysts at the time said that Mr Trump said this because he was trying to influence El Salvador’s decision bearing in mind that El Salvador uses the US Dollar as official currency and Mr Trump is a long term advocate of keeping the US Dollar as the unchallenged worldwide currency.
Today, however, El Salvador went ahead with its move and the cryptocurrencies affected by Mr Trump’s television appearance yesterday have gone back up in value again.
So there it is. History in the making. It’s now official, and could hand power to the people in a nation steeped in government corruption and poverty. This is a major move forward.
Who will follow?