A “new” currency has gained legal tender for the first time in the world this Tuesday. And it is not a new type of ticket.
Since this September 7, El Salvador became the first country to adopt bitcoin as a legal tender, in a movement that has caused the nation and many other countries to debate the opportunities and dangers of cryptocurrencies.
As of this Tuesday, Salvadoran companies and businesses are obliged, as far as possible, to accept the controversial digital currencies as a form of payment.
To encourage its use in a country where the majority of the population does not have internet access, the government is inviting Salvadorans to download a new digital wallet application that gives away $ 30 in bitcoins to all citizens.
The president of El Salvador, Nayib Bukele, announced on Twitter that his country bought the first 200 bitcoins and that they were working to buy more “as the deadline approached.”
The government has presented the measure as a way to boost economic development and employment and benefit those who send remittances.
However, polls suggest that Salvadorans are not prepared for this and international organizations such as the World Bank and the International Monetary Fund have warned against its adoption.
Critical voices believe that the change is rather a “movement of attention seeking” and “distraction” of an “authoritarian regime”.
And next week, the parliament plans to discuss a constitutional reform also promoted by Bukele and that will give the Executive more power.
As these things happen in the real world, Salvadorans will be grappling with a new currency in the virtual world.
What is bitcoin?
There are thousands of cryptocurrencies in the world: that is, digital currencies without physical form that exist and are exchanged only online.
They are created when a computer “extracts” money by solving a set of complex mathematical programs.
In this video we tell you four keys to understanding bitcoin.
What does the new law of El Salvador consist of?
In June, the Salvadoran Parliament approved the legalization of cryptocurrency as legal tender.
Specifically, it establishes that the use of virtual currency will be “unrestricted, with liberatory and unlimited power in any transaction and to any title that public or private natural or legal persons want to carry out.”
The exchange between bitcoin and the dollar will be established “freely by the market” and will not be subject to capital gains taxes, like any other legal tender.
The government has committed to creating the institutional structure necessary for the circulation of cryptocurrency and it has begun the installation of about 200 ATMs where bitcoin can be converted to dollar, although experts point out that this alone will not be enough for the change that is taking place.
Why is it a milestone?
No country in the world has dared to declare cryptocurrencies legal tender before.
However, a report published in 2018 by the Central Bank of Japan clarified that cryptocurrencies “are not legal tender and their use for payments depends on the willingness of the counterpart to accept them.”
Hence, it has drawn international attention that El Salvador, a small country with a modest economy, was the first to take this step, which was announced and approved in record time with little debate.
What are the risks?
The main criticism of the project is, without a doubt, the great volatility that characterizes bitcoin.
The cryptocurrency went from costing around US $ 10,000 in September 2020 to a maximum of US $ 63,000 in April 2021 and then fell to US $ 30,000 in July of this year. Currently around US $ 52,000.
To prevent the population from compromising its purchasing power, the government announced the creation of a trust of US $ 150 million at the country’s Development Bank to automatically redeem the bitcoins of Salvadorans who so wish.
Thus, Bukele gave as an example that if a fruit seller does not want to assume the risk of fluctuation and decides to exchange the bitcoins she receives with her work into dollars, this government-owned bank will buy them at the price at which she valued her fruit, regardless of whether the value changed from when you made your sale until you deposited the cryptocurrency in the bank.
The International Monetary Fund (IMF) warned that the dangers of adopting cryptocurrency as legal tender go beyond its volatility and that it may involve “significant risks”
The rating agency Fitch, for its part, pointed out that the adoption of bitcoin can increase regulatory risks for financial institutions, including the possibility of violating laws against money laundering and “financing of terrorism.”
Bukele announced in June that he had instructed state geothermal electricity company LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country’s volcanoes, although whether it will be feasible remains unknown.
What benefits can it bring?
Among the main advantages pointed out by the defenders of this initiative, it is highlighted that, thanks to transactions in bitcoins, the population could save the commissions of intermediaries in remittances that they receive from abroad and that can amount to up to 30% of the money sent, according to Bukele.
Remittances are a vital sustenance of the Salvadoran economy, assuming close to the 16% of your Gross Domestic Product (GDP).
Despite the pandemic, last year the country received almost US $ 6 billion from its emigrants, of which about 2.5 million live in the United States.
The president also highlighted that around 70% of the population does not have a bank account and works in the informal economy, so that cryptocurrencies could improve your financial inclusion.
Only 45% of the Salvadoran population has access to the internet and more than 90% of rural households lack it, according to a 2020 study by the IDB, IICA and Microsoft.
What do the Salvadorans think?
A survey by the Central American University (UCA) found that only 4.8% of the 1,281 respondents understood what bitcoin is and how it is used.
More than 68% of those surveyed said they disagreed with the use of cryptocurrencies as legal tender.
Jeanette Sandoval, 70, who sells home delivery groceries with her son, says she won’t get involved.
“In my country there are many people who are illiterate and hardly have a cell phone, not a smart one, but an old one. They are not going to use it, ”he adds.
The 26-year-old Salvadoran taxi driver, Daniel Hercules, for his part, says he is excited about the move, but concerned about the stability of his earnings.
Daniel says that the cost of converting bitcoin to the local currency, the US dollar, is high, 10%, so he is using the money as a savings account.
He hopes to grow his wallet to around $ 1,000 worth of bitcoin, but he is afraid that the value of the coin will collapse.