“It`s basically just the big companies that use it,” Bonilla said. “Between Bitcoin and cash, I prefer [customers] to pay myself in cash.” In theory, developing countries like El Salvador are ideal candidates for cryptocurrency adoption. More than half of citizens depend solely on cash and not on credit or debit cards. About 70% of households do not have a bank account and nearly 90% do not use mobile banking. A digital payment platform could be a way to make the economy more inclusive and accessible. The bill was commented on as something of good “public relations value” for Bukele, as a “young president trying to capitalize on a popular image.” It has also been criticized for Bitcoin`s volatility when used as an investment,[12][13] and the high transaction fees when used as a payment method. [19] On the 5th. In June, the President of El Salvador announced in a pre-recorded video at the BITCOIN 2021 conference in Miami that El Salvador would be the first country to introduce bitcoin as legal tender. The announcement was made without the knowledge of Salvadorans. On June 8, the Ministry of Economy submitted a draft law to the National Assembly, which approved it and published it in one day – an easy task, as the executive party has a super-majority in the legislature.
Bitcoin became legal tender on September 7, 2021. El Salvador is the first country in the world to make Bitcoin cryptocurrency legal. Various stakeholders have expressed doubts about the use of Bitcoin as legal tender. First, Salvadoran citizens were skeptical about the digital currency before and after the law was passed. A survey conducted by the University of Central America José Simeon Cañas, conducted between August 20 and 30, found that 95.9% of the people in the sample agreed that the use of Bitcoin should be voluntary and not mandatory; 71.2% said they were interested in using only dollars, even if they could use Bitcoin; and 66.7% replied that MPs should repeal the law. According to FUSADES` monthly surveys, in October 2021, 89.8% of businesses said they had no sales with Bitcoin and 76.9% of consumers did not make purchases with Bitcoin. On September 7, 2021, El Salvador became the first country to adopt Bitcoin as its legal tender, after the law was quickly passed three months earlier. However, Salvadoran citizens, multilateral institutions and international capital markets have not heard the news well and fear that the costs of this monetary experiment will outweigh the potential benefits.
While there are lessons to be learned from this monetary experience, El Salvador is a good example of how one cannot accept cryptocurrency as legal tender. The use of digital currencies as legal tender can only be achieved through multilateral cooperation, rather than by a single country trying to do it alone. El Salvador this month became the first country to introduce a cryptocurrency – in this case, Bitcoin – as legal tender. I say the first because others might follow. But they should think twice, because the idea is very dubious and is likely to be economically dangerous, especially for developing countries. Another disadvantage is that even digitally savvy people run the risk of forgetting passwords and losing their Bitcoin. And at least half of Salvador`s population has no access to the Internet. Second, some multilateral organizations have warned of the risks associated with introducing Bitcoin as legal tender. The IMF has repeatedly warned that the risks of adopting cryptocurrency are greater than the potential benefits, as Bitcoin is not a digital currency, but an unstable and insecure cryptoasset. In addition, the World Bank rejected a request for technical assistance from the Salvadoran government in the face of “environmental and transparency gaps”. Third, as the chart above shows, investors are concerned about the impact of the Bitcoin law on debt sustainability in El Salvador.
Although the law requires all companies to accept Bitcoin, in reality only 20% do. About 5% of all sales were paid in Bitcoin through Chivo Wallet, and just as most households that use Chivo prefer to keep their money in cash rather than Bitcoin, 88% of businesses convert their Bitcoin into dollars. The use of Bitcoin as a currency in El Salvador has been experimented with since at least 2019, and current President Bukele expressed interest in Bitcoin when he was mayor of San Salvador in 2017. Bloomberg News reported in June 2021 that Bukele and some members of Nueva`s Ideas party had owned Bitcoin for years. [9] Bitcoin has not been well received in El Salvador. National residents do not want to be forced to accept it. International markets are also not very enthusiastic. Moodyâs downgraded El Salvador`s debt in July, and S&P could do the same. The spread between the interest rate the government must pay on its debt and the U.S. Treasury interest rate has widened sharply since the initial announcement of the bitcoinization plan in June.
He is not alone. Six months after El Salvador`s Bitcoin law came into effect, the introduction of the cryptocurrency remains uneven. Even at “Bitcoin Beach,” a rugged strip on the Salvadoran coast that has become a mecca for crypto followers, the transition has been difficult. When the rest of the world came to visit shortly after the law came into effect, some were still not sure about Bitcoin. Coconut seller Dina Ponce said she was able to generate more revenue by accepting digital payments for the first time, but she didn`t fully understand the technology and Bitcoin`s value hadn`t increased enough to give it the savings she hoped for. Amherst Pierpont`s Siobhan murders commented that the law could complicate Bukele`s talks with the International Monetary Fund. [20] She noted that the law “would likely only increase concerns about corruption, money laundering and the independence of regulators.” [16] Carlos de Sousa of Vontobel Asset Management expressed concern that the decentralised system would facilitate money laundering and tax evasion. [20] According to Ernst & Young, the introduction of Bitcoin as legal tender in El Salvador could have consequences for US taxpayers holding the cryptocurrency, as “as more and more countries adopt Bitcoin as their legal tender, the US federal tax treatment of Bitcoin could change. Rather than being treated as an investment that is a capital asset, Bitcoin could be treated as generating ordinary income under Section 988. [21] The introduction of Bitcoin as legal tender surprised everyone except the small group of people involved in the design.
The implementation of the Bitcoin law has been hampered by the lack of public debate; lack of feedback from monetary policy experts and multilateral organizations; and lack of transparency. To correct this path, it is necessary to reform the law so that Bitcoin is voluntary and not mandatory, and is not as susceptible to abuse as the payment of salaries or pensions, ensuring that there is real training in the use of virtual assets.
