El Salvador is welcoming Bitcoin as legal tender, making history, and setting a new monetary standard for the global financial system.
Last week, the El Salvador Congress approved its “Bitcoin Law” with 62 out of 84 votes, making the country the first to adopt the cryptocurrency as legal state tender.
The adoption, which will become effective in 90 days, should bring with it big business and foreign investment opportunities to the country; although some experts have also expressed concerns related to the volatility of the crypto price.
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According to the new law, businesses in El Salvador will have to accept Bitcoin as a form of payment – with exceptions granted to merchants who are not able to offer the technology needed to carry out the payment transaction – i.e. an internet connection.
It brings about some immediate benefits, some long-term economic development opportunities, and some risks and logistical issues as well. But let’s start with the positives.
Firstly, as 20% of the GDP in El Salvador relies on money sent home by Salvadorians abroad, making Bitcoin a legal tender means money coming in can arrive faster, more cheaply, and be immediately spent in the real economy. The lower Bitcoin transaction costs compared to traditional intermediaries like Western Union, mean that the country could receive an additional $1 billion into its economy each year.
Secondly, facilitating access to the decentralized financial services that come with crypto can transform the lives of 70% of its local population who still don’t have access to bank accounts or basic financial services.
As noted by Forbes, the move, seen as a historic moment in monetary policy with important ramifications in the global financial system, ushers in a new era of global monetary inclusion. DeFi ecosystems – already offering a vast array of financial services independent from banks and centralized institutions – can tackle issues related to the country’s widespread financial discrimination.
Thirdly, the engine set to promote the development and adoption of the technology is opening up foreign investment opportunities. The Bitcoin Law includes a tax-cuts for Bitcoin-related ventures and permanent residency to foreign entrepreneurs in the sector.
The predictability of the legal environment around the move is poised to attract investment into what Bukele calls “a sanctuary for the crypto.”
Lastly, until further developments, Bitcoin adoption provides a major impulse for the development of related state infrastructure and another reason to pioneer a solution to one of the hottest issues around crypto: its energy consumption.
On the day after the law was voted in Congress, Nayib Bukele, the country’s 39-year old president took the “disruptive innovation” one step forward. In a tweet, he announced that he had “instructed the president of LaGeo,” the state-owned geothermal energy company, “to put up a plan to offer facilities for bitcoin mining with very cheap, 100% clean, 100% renewable, [zero-emissions] energy from our volcanoes.”
Our engineers just informed me that they dug a new well, that will provide approximately 95MW of 100% clean, 0 emissions geothermal energy from our volcanos 🌋
Starting to design a full #Bitcoin mining hub around it.
What you see coming out of the well is pure water vapor 🇸🇻 pic.twitter.com/SVph4BEW1L
— Nayib Bukele (@nayibbukele) June 9, 2021
Volcanic heat generates almost one-quarter of the energy in El Salvador, and two-thirds of this geothermal energy still remains untapped. Improvement of the geothermal infrastructure will not only attract investment and revenue but will also lower the costs of taking energy to rural areas.
The bill also anticipates some of the practical considerations involved with the adoption of Bitcoin as legal tender. The legislation stipulates that “the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.”
Another logistical difficulty is to provide internet in all parts of the country. To this end, the government will partner with Blockstream to install a system of satellites providing internet access to remote areas. Of course, Salvadorans will also have the option to use Strike – an official, government-sanctioned smartphone wallet, as well as any other compatible wallet of their choice.
In order to allow an organic integration of the adoption by the wider population, the Salvadoran government is also setting up a $150 million trust at the Development Bank of El Salvador. With it, merchants who distrust Bitcoin’s volatility will be able to immediately exchange crypto for FIAT on their balance sheets. The U.S. dollar will also remain legal tender in the country, and be used as the “reference currency” for accounting purposes.
Elsewhere in the region, and in reaction to El Salvador’s Bitcoin Law, Paraguay is working with PayPal on a project to bring the Bitcoin standard to the country, and Panama is preparing a proposal in support of the cryptocurrencies to present to its Legislative Assembly. Finally, Mexico, Brazil, Colombia, and Argentina are following the backing and firing up their legislative engines as well.
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