El Salvador wants to accept Bitcoin as legal tender: What’s the reason?

“Next week I will send to Congress a bill that will make Bitcoin a legal tender in El Salvador,” Said President Nayib Bukele in a video broadcast at the Bitcoin Conference 2021 in Miami, USA. His announcement raised criticism and a worldwide debate.  In this article, Tokenize Blog will go deep into the reason why El Salvador wants to adopt Bitcoin. 

Said President Bukele: “In the short term this will generate jobs and help provide financial inclusion to thousands outside the formal economy and in the medium and long term we hope that this small decision can help us push humanity at least a tiny bit into the right direction.” He said via Twitter that his government would give “immediate permanent residence to crypto entrepreneurs”.

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President Nayib Bukele, 39, has been in power since 2019. His party New Ideas won a major victory during March 2020 National Assembly elections, winning 56 out of 84 seats which means that his Bitcoin bill is likely to pass. El Salvador is the smallest country in South America with 40% of the population living in poverty. 

President Bukele’s proposal has raised understandable controversy and skepticism among the cryptocurrency community, legislators, and other observers around the world. To understand why this announcement is not as crazy as it sounds, let’s zoom on the economy of El Salvador and how Bitcoin might become a financial solution for this country. 

Why Salvador wants to become the first country to adopt Bitcoin

El Salvador is a cash-based country where about 70% of people don’t have a bank account or credit card. Remittances account for more than 20% of El Salvador’s gross domestic product.

Bukele’s tweet 

El Salvador has been struggling with its local currency system for decades, in which El Salvador maintains two forms of currency in its monetary system: Colons and US dollar. El Salvador’s Colon keeping inflation down was the key factor in the authority’s plan to attract more foreign investors. However, the government gave up controlling its monetary policy and fixed exchange rate in 2001, leading to their “dollarized” economy. Since then, USD has been used as legal tender in this country, for this reason, its monetary system has been under the effect of the U.S Federal Reserve Bank. 

That brings El Salvador to Bitcoin. 

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According to Bitcoin entrepreneur Jack Mallers, this move was a reaction to “unprecedented monetary expansion”. In a country with an unstable and “dollarized” monetary system like El Salvador, Bitcoin can be considered as an alternative that allows citizens to select without empowering the black market. 

According to an excerpt from Bukele’s proposed legislation, it becomes necessary to allow the circulation of a cryptocurrency with a supply that is not under the control of any central bank. 

What will happen if Bitcoin becomes legal tender of El Salvador

According to President Bukele, Bitcoin as legal tender will have a positive effect on the El Salvador economy. 

• Provide financial solutions for the economy: Said Bukele “In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy,” However, he did not make it clear how it works.
• Attract foreign investment: according to Bukele’s tweet, with just 1% of Bitcoin invested in El Salvador, the GDP would rocket by 25%. 

• Reduce transaction costs: since one-fourth of the country’s GDP which equals $6 billion per year arises from foreign remittances, accepting Bitcoin as legal tender would help millions of low-income families in this country avoid a huge amount of international transaction fees when they receive money from family members working abroad. 

“We hope that this decision will be just the beginning in providing a space where some of the leading innovators can reimagine the future of finance, potentially helping billions around the world.” Said Bukele. However, is Bitcoin really a solution? We will get to find the answer. 

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