El Salvador recently became the first country to adopt Bitcoin as legal tender, alongside the US dollar, after 62 of the 84 members of the Congress voted in favour of the plan designed by President Nayib Bukele.
A renowned economist in El Salvador commented, “Bukele sent a video to a Bitcoin conference in Miami, announcing he would give legal recourse to Bitcoin in El Salvador. That happened on a Friday and the following Tuesday afternoon the law was sent to the Legislative Assembly and approved that evening. Bukele has absolute power, he controls the Executive, has a large majority in the Legislature and even manages the Judiciary – he changes the magistrates of the constitutional chamber and dismissed the general prosecutor. There is no opposition, there is no way to protest.”
“Bukele has absolute power, he controls the Executive, has a large majority in the Legislative and even manages the Judiciary.”
Renowned economist, El Salvador
The economist continued to give some background to El Salvador’s interest in Bitcoin, “Jack Mallers, the founder of Strike, was in El Salvador and launched a pilot project [a social experiment] in a small town on the beach. He then approached Bukele’s brother, Karim, and convinced him that El Salvador should go for this.”
The law does not provide detailed measures on how the policy will be implemented in the real economy. President Bukele said that the regulation would generate jobs, provide financial inclusion to the 70% of Salvadorans without bank accounts and would simplify the transfer of remittances for the two million Salvadorans living abroad who send back more than USD 4 billion per year.
Experts are divided about the potential impact of the measure. Some economists have warned about the dangers of combining Bitcoin with US dollars, as Bitcoin holders in Russia, China, Iran or elsewhere around the globe could swallow off all dollars in the country. It is also unlikely that using Bitcoin will attract more remittances, as commission rates for withdrawing Bitcoin from an ATM currently amounts to 8% while companies like Western Union charge between 0% and 4%. A banking executive in El Salvador was furious, “People have been sold the idea of sending remittances instantly and free of charge but just wait until they try to take that money out of an ATM, there will be plenty of commissions and charges.”
“People have been sold the idea of sending remittances instantly and free of charge but just wait until they try to take that money out of an ATM.”
Banking executive, El Salvador
The economist was also sceptical, “The World Bank has said it will not support El Salvador on this but the Central American Bank for Economic Integration (“CABEI”), one-fifth owned by the government of El Salvador, announced that they will provide technical support. The government has just 90 days to present the regulations, but there are no suitable examples anywhere in the world, so they have to do it all from scratch.”
The lack of a clear plan from the government to promote the use of Bitcoin likely will not force business and private companies to accept Bitcoin in exchange for goods and services. Moreover, the currency does not work well as money for a medium of exchange which makes it very difficult to accept for mainstream transactions. The economist explained, “Using Bitcoin on a day-to-day basis will be difficult, people do not understand it, they are not prepared for it and its volatility makes it terrible for everyday use.”
According to the economist, “There are two main beneficiaries from this, the first is Bukele, he wants to de-dollarise El Salvador and launder his money, Bitcoin ticks both boxes. The second is Strike, the government has given them an illegal monopoly and they stand to make millions. Some people are hoping Bukele will step back from this, but I think he’s committed now, it will be hard.”