Bitcoin as a legal currency

Bitcoin as a legal currency

The Bitcoin Law was adopted by El Salvador’s new Legislative Assembly, which is controlled by President Nayib Bukele’s New Ideas party. The document establishes this small Central American country as the world’s first to use bitcoin as legal money. And it’s not just for gambling online.

Bitcoin is an electronic currency, this means that it does not exist as a physical currency. In addition to this, Bitcoin is not controlled by a central bank, therefore the value of this currency is only controlled by the demand in the market.

Now that cryptocurrencies have grown in the market, many people and governments have considered making these coins legal tender, this means that there would be laws on the legal circulation of cryptocurrencies in that country. This would make using them for the purchase of goods and services legal, and even as far as accounting and taxes to be done through them.

El Salvador, the first country to have Bitcoin as a legal currency

On November 30, 2000, without any discussion in what was known as “the early morning”, the Legislative Assembly controlled by the Arena party approved the Monetary Integration Law, dollarizing the economy of El Salvador.

21 years later, El Salvador surprises the world and becomes the first country to accept bitcoin as legal tender. As of September 7, the cryptocurrency comes into force at the initiative of the president, Nayib Bukele, who is convinced that it will be a benefit for the country’s economy, which was dollarized two decades ago. The measure was approved in June expeditiously by the majority-ruling Congress.

The Ministry of Economy claims that 70% of the population lacks access to traditional financial services, which is one of the project’s proponents’ justifications.

Furthermore, the Ministry stated that to enhance the country’s economic growth, “it is necessary to approve the circulation of a digital currency whose value is determined solely by free-market conditions” to generate wealth.

“The Bitcoin law is ambitious but clear; it is also carefully created to ensure that those who are unwilling to take risks are not put in danger.” On Twitter, Bukele remarked, “While the law is being completed, the government will assure convertibility to the correct amount in dollars at the time of the transaction.”

El Salvador already has 200 bitcoins to welcome the legal course of the currency. And according to President Nayib Bukele, government brokers will buy “much more as the deadline approaches,” as he expressed on his Twitter account.

Now we will show you some characteristics of this authorization of bitcoin in El Salvador.

Chivo electronic wallet

Since Bitcoins do not exist physically, they are stored in digital applications that are downloaded to the mobile phone and function as electronic wallets.

The one in El Salvador is called “Chivo”, which in the country is synonymous with “good”, and to use it you must have a Salvadoran document. The businesses must present a tax identification number and a legal representative document.

The user can configure their Chivo wallet with an automatic version in dollars. In this way, a company can receive all the payments it processes in dollars, even if they are in Bitcoins.

The government installed 200 ATMs called “Chivo points” throughout the country for deposits and withdrawals.

The mandatory use of bitcoin

Despite promises from government officials and Bukele himself that adoption will be voluntary, the Bitcoin Law’s proclamation has concerned some members of the public since it stipulates that “any economic agent must accept bitcoin as a form of payment.”

According to the legislation, “any economic agent must accept Bitcoin as a means of payment when it is offered to him by whoever receives a product or service.”

But if the commercial establishment does not want to receive Bitcoins in its account, the “Chivo” application immediately converts the amount to its equivalent in dollars.

For transactions, both parties must have an electronic wallet.

This twist in Salvadoran economic policy is typical of the president’s style, strident advertisements that end up with enormous publicity and media coverage. Organizations like the International Monetary Fund have taken notice of the outcry, warning that “the acceptance of bitcoin as legal currency poses several macroeconomic, financial, and legal concerns that demand extremely careful examination.”

What can be paid with Bitcoins?

According to the new legislation, the Salvadoran government would ensure the automated and rapid conversion of bitcoin to the dollar by establishing a trust with the Development Bank of El Salvador (BANDESAL). Those who, due to a notorious fact and in an obvious way, “do not have access to the technology” that allows the execution of transactions, are excluded.

According to the proposed legislation, the Salvadoran administration would ensure the automated and immediate conversion of bitcoin to dollars by setting a trust with the Development Bank of El Salvador (BANDESAL).

The state will encourage the required training and processes to allow the general public to participate in bitcoin transactions, according to the document. The dollar will be utilized as the reference currency for accounting purposes.

The cryptocurrency may be used “in any transaction and any title that public or private natural or legal persons required to carry out.”

With the wallet you can process payments for services, buy and sell products and make transfers to bank accounts without charging fees, for example.

Even, “all the obligations in money expressed in dollars, existing before the effective date of this law, may be paid in Bitcoins,” the law specifies.

How does El Salvador finance the measure?

To boost the use of cryptocurrency, Bukele offered to give away $30 worth of bitcoin to each person who downloads the government virtual wallet “Chivo.”

However, this incentive seems to be insufficient to break the apathy within the population if it is considered that this is a country with only 45% of the population with internet connectivity, according to a study by the Inter-American Development Bank and where the cost connected to the global network is high for a nation with 26% of people living in poverty, according to the Household and Multiple Purpose Survey.

To boost Bitcoin, the government has turned to $203 million of public funds.

Of this money, 150 million were destined to guarantee the convertibility of Bitcoin to the dollar, 23.3 million dollars to finance the project, and another 30 million to provide the bonus of 30 dollars to each person who downloads the Chivo wallet.

How does Bukele defend the measure?

President Bukele assures that the adoption of Bitcoin will contribute to the banking of the population and will generate a saving of 400 million dollars in the cost of remittances that Salvadorans abroad send to the country.

The country receives about seven billion dollars a year in remittances from Salvadorans living abroad, which are equivalent to about 16% of the Gross Domestic Product. An estimated 2.5 million Salvadorans live in the United States.

According to the president, the new norm will help financial inclusion, investment, tourism, innovation, and economic development. He stated, “Don’t tell us we’re too small to be enormous.”

What do economists and international organizations say?

The Salvadoran economist, Merlin Barrera, considers that the circulation of crypto active as a means of payment poses “a complex situation” since it is “a currency whose value depends on speculation in the markets.” High volatility is the expert’s main objection to this measure.

“It is neither essential nor convenient to grant something like bitcoin the status of legal money,” Carlos Carcach, a professor at the Higher School of Economics and Business (ESEN), told The Associated Press. Some Salvadorans already utilize it as a form of payment in addition to other choices.”

He said that, like any currency, bitcoin’s function is to enable transactions, such as the buying and selling of services, and that “as long as there is someone who takes bitcoin payment, just like they accept dollars, there would be no difficulties.” For Carcach, the principal is investing in bitcoin, because “you are subject to the external volatility that it presents and you run the risk of becoming rich and the next day being poor.”

The International Monetary Fund (IMF) has warned since June that “the adoption of Bitcoin as legal tender raises several macroeconomic, financial and legal problems that require very careful analysis,” said IMF spokesman Gerry Rice.

The World Bank and the Inter-American Development Bank have also expressed skepticism and warned that the measure is risky.

El Salvador already suffers “the impacts of the volatility of the price of Bitcoin” that aggravate “the high levels of inequality, poverty, unemployment, migration, and violence,” said the former president of the Central Reserve Bank of El Salvador, Óscar Cabrera.

What do fans of Bitcoin think?

Bitcoin is “like digital gold,” according to Brock Pierce, a cryptocurrency billionaire. “This is where you save money for a tough day in the future, this is for your savings account.”

Of course, “I do not advise that they use this to make their daily payments, to buy the things they need, to put food on the table or pay the rent,” he considered.

“Unfortunately, the issue became a bit politicized, but what people have to know is that if they do not want to use Bitcoin, they do not have to. It is only an added value that they have”, estimates the American Mike Peterson, pioneer of the use of Bitcoin in El Salvador.

What do Salvadorans think?

“They should have given a lot of guidance first (on the use of bitcoin),” says the street vendor of kitchen utensils, Óscar Martínez, as he walks through the heart of the capital and takes the opportunity to take a selfie in front of one of the 200 ATMs that the government has arranged so that Salvadorans can obtain the cryptocurrency or exchange it for dollars.

In the center of San Salvador, a space that concentrates a large part of the formal and informal commerce of the city, it is possible to verify the ignorance and uncertainty around the use of bitcoin, since many find it unlikely to trade with a currency that they cannot feel. “I am not prepared to use bitcoin and there are many people who do not have a telephone or know how to use it,” says Ileana Ortiz, who loudly calls out the sale of masks that protect from the coronavirus in a street practically taken over by street vendors.

On the other hand, there are other traders who, faced with the inevitable, have preferred to anticipate. Orlando Gómez, three months ago, downloaded an electronic wallet to learn about the experience of trading with bitcoins, “my expectations are high, so far I have not had transactions, if people have asked me and I tell them that it is easy, only with the phone they make the transfer to me ”, he explains.

The authorities insist that the digital currency will bring opportunities in the short term that must be taken advantage of, such as job creation and financial inclusion for the thousands of people who are outside the formal economy, in addition to opening the door for “ foreign investors in bitcoin ”invest in El Salvador. They also claim that it could reduce the costs of sending remittances from abroad, mainly from the United States, which totaled almost 6 billion dollars in 2020.

Bukele plays a lot with this daring decision. Only time will tell whether or not bitcoin succeeds in taking root in the fragile Salvadoran economy.

The next country to do this

Following El Salvador, Brazil is expected to be the next country to accept Bitcoin as a currency. Brazilian Federal Deputy Aureo Ribeiro said earlier this week that Bitcoin will soon be the country’s currency and that Brazilians “will soon be able to buy houses, cars, and even McDonald’s with Bitcoin, after its law is approved,” according to Brazilian crypto media portal Livecoins, citing Ribeiro’s interview with local media.

On September 29, Brazil’s Bitcoin bill 2.303/15 was introduced in the Brazilian House of Representatives and passed. The legislation will now be considered in Brazil’s National Congress’s lower body, the Plenary of Chambers of Deputies.

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