El Salvador makes bitcoin legal tender

gangleri2001

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In a world first, El Salvador makes bitcoin legal tender
Nelson Renteria Tom Wilson Karin Strohecker
5 minute read

El Salvador became the first country in the world to adopt bitcoin as legal tender after Congress on Wednesday approved President Nayib Bukele’s proposal to embrace the cryptocurrency, a move that delighted the currency’s supporters.

With 62 out of 84 possible votes, lawmakers voted in favor of the move to create a law to adopt bitcoin, despite concern about the potential impact on El Salvador's program with the International Monetary Fund.

Bukele has touted the use of bitcoin for its potential to help Salvadorans living abroad to send remittances back home, while saying the U.S. dollar will also continue as legal tender. In practice, El Salvador does not have its own currency.

"It will bring financial inclusion, investment, tourism, innovation and economic development for our country," Bukele said in a tweet shortly before the vote in Congress, which is controlled by his party and allies.

In an idea he appeared to have developed overnight, Bukele later said he had instructed state-owned geothermal electric firm LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country's volcanoes. read more

He said the idea was to build a bitcoin mining hub around the country's geothermal potential. He also said that El Salvador would offer citizenship to people who showed evidence they had invested in at least three bitcoins.

The use of bitcoin will be optional for individuals and would not bring risks to users, Bukele said, with the government guaranteeing convertibility to dollars at the time of transaction through a $150 million trust created at the country's development bank BANDESAL.

Under the law, bitcoin must be accepted by firms when offered as payment for goods and services. Tax contributions can also be paid in the cryptocurrency.

"If you go to a McDonald's or whatever, they cannot say we're not going to take your bitcoin, they have to take it by law because it's a legal tender," Bukele said in an online conversation he held with crypto-currency industry figures in parallel to the debate in Congress.

Its use as legal tender will begin in 90 days, with the bitcoin-dollar exchange rate set by the market. Bukele said the government and Central Bank did not currently hold any bitcoin.

In the capital, San Salvador, reactions were mixed, with some excited that the new currency could increase prosperity and financial options. Others were skeptical.

"How am I going to agree with this? I haven't seen it even in photos. I know nothing about it, you need to understand your currency," said Estela Gavidia, clutching shopping bags and recalling the loss of purchasing power many poor people suffered when the dollar was adopted in 2001.

Cryptocurrency supporters hailed the move as legitimising the emerging asset, but its impact on bitcoin regulation, taxation or adoption in other countries remains to be seen.

There were no immediate signs that other countries would follow El Salvador's embrace of bitcoin.

"Whether this becomes the first in what becomes a trend and then snowballs, or whether this will be a blip, we will only know through history," said Brandon Thomas, partner at advisory firm Grayline Group.

Analysts have also said the move could complicate talks with the IMF, where El Salvador seeks a more than $1 billion program. read more

Bukele said he will meet with the IMF on Thursday to discuss the bitcoin law, among other issues. He said in setting up the meeting he had tried to explain to them that the shift was "not going to change our macroeconomics."

Bitcoin enjoyed its best day in two weeks, rising as much as 6% to $35,200.

"The market will now be focused on adoption through El Salvador and whether other nations follow," said Richard Galvin of crypto fund Digital Asset Capital Management. "This could be a key catalyst for bitcoin over the next two to three years."

BEACH INSPIRATION

It was not immediately clear how long Bukele had been working on the bitcoin plan, but he said on Wednesday he was inspired by a project called Bitcoin Beach that introduced the cryptocurrency in an El Salvador beach town last year.

He worked on the idea with Jack Mallers, CEO of Strike, a digital wallet that uses the Lightning Network to enable small payments in Bitcoin.

Bukele has also pointed out a tweet of his from 2017, before he was a presidential candidate, in which he suggested using bitcoin.

Emerging economies - where bank penetration is much lower than in developed countries and reliance on money transfers from abroad much higher - have quickly warmed to cryptocurrencies.

Outside the United States, countries with the highest crypto production and trading volumes are all developing nations, according to BofA, including China, Colombia and India.

Bukele says some 70% of people in El Salvador lack access to traditional financial services.

But the use of digital currencies in general can also pose risks for dollarized economies, analysts say.

"The root cause of dollarization is high local inflation, which could worsen, too, if digital currencies prove inflationary," said David Hauner at BofA.

El Salvador relies heavily on money sent back from workers abroad. World Bank data showed remittances to the country made up nearly $6 billion or around a fifth of GDP in 2019, one of the highest ratios in the world.

The cryptocurrency offers, in theory, a quick and cheap way to send money across borders without relying on remittance firms typically used for such transactions. It is not clear what proportion of remittances sent to El Salvador are in bitcoin.

Converting local currencies to and from bitcoin often relies on informal brokers, while trading often demands technical knowledge.

El Salvador will promote training and mechanisms to allow access to bitcoin transactions, the law said.

Financial regulators and policymakers warn bitcoin facilitates money laundering and other illicit uses.

Bukele brushed off the fears, saying criminals already use U.S. dollars and other assets to launder money.

“The problem is not the dollar, it is the criminals,” he said.

A SOURCE: https://www.reuters.com/world/ameri...es-first-law-bitcoin-legal-tender-2021-06-09/
 

The_J

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While interesting, I don't expect that this will really take of significantly. Or if it does, it will not have positive effects. The bitcoin is way to volatile to be used as real currency. It might lead to economic instability, if they really use it.
 

Samson

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I suppose when you already have a foreign fiat currency as legal tender then bitcoin sounds slightly less mad, but still quite mad. Can i rant about this bit:

The cryptocurrency offers, in theory, a quick and cheap way to send money across borders without relying on remittance firms typically used for such transactions.
  1. More generally, if the theory predicts something that is not seen in reality the theory is wrong. This should be the answer any time someone says "In theory.."
  2. What theory says this? Bitcoin transaction prices are well modelled by the real maths, and are not "cheap" by most people's definition (April 21st they averaged $62.79). Other cryptocurrencies are much better (moneros spring peak was May 10th at 14 cents).
 

TheMeInTeam

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While interesting, I don't expect that this will really take of significantly. Or if it does, it will not have positive effects. The bitcoin is way to volatile to be used as real currency. It might lead to economic instability, if they really use it.

If it does take off, I'd expect it in countries where their currencies are weaker than MMO currencies or something. I wouldn't be surprised if some governments wind up banning crypto too, which is also a bad sign.
 

Rashiminos

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While interesting, I don't expect that this will really take of significantly. Or if it does, it will not have positive effects. The bitcoin is way to volatile to be used as real currency. It might lead to economic instability, if they really use it.
Bitcoin's volatility is directly related to its past tendencies in being a merely speculative instrument. Circulation in an actual economy will have a dampening effect, as with other varieties of fiat currency. The general upward movement in dollar-denominated price long term is the result of deflationary pressure, this time caused by the increased complexities of the economies that cryptocurrencies are circulating in.
 
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Naskra

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Can Gresham’s law apply to a money that isn’t money?

Gresham would only apply if they were foolish enough to adopt a fixed exchange rate; that would break any bank within an hour.
 

Samson

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Bitcoin's volatility is directly related to its past tendencies in being a merely speculative instrument. Circulation in an actual economy will have a dampening effect, as with other varieties of fiat currency. The general upward movement in dollar-denominated price long term is the result of deflationary pressure, this time caused by the increased complexities of the economies that cryptocurrencies are circulating in.
Bitcoin has not got the capacity to be a circulating currency.
 

El_Machinae

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You know, some day I should do a deepdive into what I see as the weaknesses of bitcoin to act as a transfer-of-value, and then maybe take a position in a coin that doesn't have those weaknesses. If investors actually want crypto (outside the FOMO crowd), then there eventually could be a winner.
 

innonimatu

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So they've got nothing to lose... :D

You got me to do my laugh of the day :lol:
They're just catering to criminals. There's such a thing as "tourism for criminals", and countries peddling services for criminals. The tax hell islands, El Salvador, and a few others.
 

Birdjaguar

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@Samson That was a very informative link. Thanks.
 

gangleri2001

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It's 12:55 am in El Salvador, which means that the law came into effect 55 minutes ago. Bitcoin is already legal tender in all of El Salvador.
 

Samson

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Just 3 days after a court stuffed with his cronies says presidents can serve two straight terms

El Salvador’s top court has ruled that the country’s president can serve two consecutive terms, opening the door for incumbent Nayib Bukele to stand for re-election in 2024.
Issued late on Friday, the ruling was handed down by judges appointed by lawmakers from Bukele’s ruling party in May after they had removed the previous justices, a step that was decried by critics as a “coup d’etat” and drew strong criticism from the United States and other foreign powers.​
 

Moriarte

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For anyone interested in the scale of the thing: El Salvador now holds 400 btc, which, as of today are worth $20.6 mil. For reference, btc trading volume during last 24 hours amounted to $43 bn. In short, El Salvador is the drop of water in the sea of bitcoin.
 

Gelion

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What is the total value of this digitally emitted currency?
 

Samson

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For anyone interested in the scale of the thing: El Salvador now holds 400 btc, which, as of today are worth $20.6 mil. For reference, btc trading volume during last 24 hours amounted to $43 bn. In short, El Salvador is the drop of water in the sea of bitcoin.
I wonder how much of the is genuine movement of positions and how much is self trading. I think we will never know.
What is the total value of this digitally emitted currency?
The global crypto market cap is $2.29T. I would say that is not equal to value, but that is more philosophical than economic.
 

gangleri2001

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Just 3 days after a court stuffed with his cronies says presidents can serve two straight terms

El Salvador’s top court has ruled that the country’s president can serve two consecutive terms, opening the door for incumbent Nayib Bukele to stand for re-election in 2024.
Issued late on Friday, the ruling was handed down by judges appointed by lawmakers from Bukele’s ruling party in May after they had removed the previous justices, a step that was decried by critics as a “coup d’etat” and drew strong criticism from the United States and other foreign powers.​

As if that had anything to do with bitcoin or even had the potential to have any effect on it. Even if he wasn't reelected in 2024, by then bitcoin would already be highly implemented and I also really doubt that any Salvadoran (opposition included) would happily get rid of their bitcoins amidst the 2024 halving and the subsequent increase in valuation it causes.

For anyone interested in the scale of the thing: El Salvador now holds 400 btc, which, as of today are worth $20.6 mil. For reference, btc trading volume during last 24 hours amounted to $43 bn. In short, El Salvador is the drop of water in the sea of bitcoin.

That's just El Salvador's bitcoin reserve as of now since they are implementing the Lighting-Network-based Chivo Wallet, which is the wallet that should allow all Salvadorans to pay using BTC and the government has compromised to give access to all its citizens in order to allow this new legal tender to be easily accepted by everyone. This 400 BTC reserve is just the beginning, as they implement the Chivo wallet they will progressively increase their reserves and this implementation will be gradual as the US dollar will still be legal tender in El Salvador as well (and theoretically speaking the Salvadoran Colón is legal tender as well, even though I don't think anybody uses it anymore) so we might see things like Gresham's law largely affecting bitcoin's circulation in the country, specially in the beginning.

Besides, the really big thing about the El Salvador's bitcoin reserve is not the amount they purchase and keep in their reserve but rather the government's plan to take advantage of the abundant geothermal energy in the country to implement massive state-owned bitcoin mines which means that, as halvings go by and make it harder and harder for private investors to make a profit in the mining scene, we could easily end up with El Salvador's bitcoin reserve being a huge player in the bitcoin mining scene.

You certainly can't take a look at their current 400 BTC reserve and conclude that that is all and that El Salvador is just a drop of water in the bitcoin ocean. You've got to take a look at the bigger picture first.

What is the total value of this digitally emitted currency?

The global crypto market cap is $2.29T. I would say that is not equal to value, but that is more philosophical than economic.

Whereas the 2.29T figure is true for the whole crypto market, you've got to take into account that bitcoin's current market cap is 957.45 billion US dollars.
 
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