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El Salvador is Adopting Bitcoin as Legal Tender. What Does That Mean?


TL;DR (3-minute read)

  1. El Salvador has declared Bitcoin to be a legal tender in the country, alongside the U.S. Dollar.
  2. Much doubt has arisen about the practicality of this decision, with the price of 1 BTC in the thousands, along with the environmental tax on El Salvador due to the vast amount of resources needed for Bitcoin mining.
  3. The government of El Salvador plans to use geothermal energy from volcanoes in the country to power the mining of Bitcoins.
  4. There have been positive reactions, with the price of Bitcoin increasing, along with negative reactions from financial analysts, major banks, and the International Monetary Fund.
  5. But in all, the main impact is on the future of El Salvador, where foreign remittances are a major part of the economy. However, this only means the country will recoup money from remittance taxes, but there will be no other significant change in El Salvadoran society.

Key Questions to Consider:

  1. What happened in El Salvador surrounding the authorization of Bitcoin as legal tender?
  2. What has the reaction been to this extraordinary event?
  3. How will this affect the future of El Salvador?

1: What happened in El Salvador with Bitcoin?

On June 9, the president of El Salvador, Nayib Bukele, announced that Bitcoin would become an accepted currency, along with the United States Dollar. This is the first instance of Bitcoin becoming an official tender in the world. This is a big occurrence in the legitimization of cryptocurrency, often portrayed as a joke by many. Bitcoin can now be used by El Salvadorans to pay taxes, buy commerce, or any other activities involving the exchange of currency, which until now was solely done with the United States Dollar. It is unclear how it can be used in day-to-day life, for the value of Bitcoin is in everlasting fluctuation. However, the El Salvadoran government claims that the exchange rate between Bitcoin and the U.S. Dollar “will be freely established by the market” (CNBC). Additionally, the production of Bitcoin, called Bitcoin Mining, is incredibly taxing on environmental resources, needing a constant source of electricity. The government of El Salvador in response has claimed that they will use the geothermal energy produced from the volcanoes in the country to power their Bitcoin mines. With Bitcoin being adopted as legal tender in El Salvador, there are many facets and a wide range of reactions from investors and monetary organizations. 

The flag of El Salvador (Shutterstock)

2: What has the reaction been to this decision by El Salvador?

The reaction to the adoption of BItcoin as legal tender by El Salvador has been massively varied. As of June 10, the price of 1 BTC has increased six percent , to around $37,000 (Kharpal), in direct response to the new status of Bitcoin in El Salvador. The International Monetary Fund, however, reacted quite negatively, expressing trepidation upon this radical decision, as expressed by IMF analyst Gerry Rice, who said, “Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis” (Reuters). The adoption of Bitcoin as legal tender has also complicated the relationship between El Salvador and the IMF, who before had a billion-dollar deal surrounding the relief of El Salvador’s gargantuan debt. In addition to this negative reaction, El Salvador’s future bonds have also declined. The adoption of Bitcoin as legal tender in El Salvador is a major financial event that has elicited many reactions across the financial world, but there is also a major impact on the future of El Salvador.

Nayib Bukele, president of El Salvador (Getty Images)

3: How will this decision impact the future of El Salvador?

The impact on the future of El Salvador with the adoption of Bitcoin as legal tender is significant in one domain of their economy: remittances. Nearly 20 percent of the El Salvadoran economy is fueled by foreign remittances from El Salvadorans working abroad and giving money back home. However, there is a tax on remittances which means that a significant part of the money is diverted and only a little amount is left for the families of migrant workers, but with Bitcoin now being a legal tender in El Salvador, there will be no tax on Bitcoin remittances, meaning more money for the families of migrant workers. In other zones of El Salvador’s society, there will not be much impact because Bitcoin is very tough to effectively use, due to its volatility and its high conversion rate to the U.S. Dollar. In all, El Salvador’s decision to adopt Bitcoin as legal tender has sparked many reactions across the financial world and changes the value of remittances, due to the lack of tax on remittances of Bitcoin.

(Getty Images)

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