The versatility of bitcoin has caught the eye of private co-operations and government. The President of El Salvador, Nayib Bukele, happens to be one of the people who bitcoin has caught their attention. He wants to make bitcoin a ledger tender for the people of the Central America Nations.
The 2021 Bitcoin Meeting
Towards the end of the 2021 Bitcoin meeting in Miami, Nayib Bukele announced that El Salvador would be making bitcoin a legal tender. This announcement was followed up with days of midnight passage of the law. At the June 9th meeting, a voting process was carried out, and it happens to be that 62 out of 84 possible votes were attained. Lawmakers also voted for the creation of a law to adopt bitcoin.
At the end of this meeting, article seven of the passed law states that “Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good service.” The president of El Salvador claims that adopting bitcoin will create jobs and also enhance the financial inclusion of many outside the formal economy.
What It Means To Make Bitcoin a Legal Tender
Making Bitcoin a legal tender means being able to use Bitcoin for transactions. Since June 9th, 2021, Bitcoin has become a legal tender in El Salvador and other countries. In any country that makes Bitcoin a legal tender, it is expected that every economic agent must agree to pay with Bitcoin no matter the goods bought or service rendered.
El Salvador abandoned its currency colon in 2001 and made US dollars its legal tender. This process of official dollarisation was to increase trade with the US and curb inflation.
Therefore, if El Salvador selects a new legal tender, there is not much to lose.
Reasons why El Salvador adopted Bitcoin as a legal tender
President Nayib Bukele claims that there are positive reasons behind him adopting Bitcoin as a legal tender. Some of these reasons are;
- It helps improve the country’s economy
El Salvador is a place where 70 percent of the people who reside there have no bank account. The residents of this country deal mainly in a cash economy. President Nayib Bukele also said that unnecessary fees for money sent from outside the country. These International transfers cost up to 10 percent of the total payments they pay.
El Salvador accepting Bitcoin as a legal tender will help reduce the fees paid by its residents. President Nayib Bukele believes that Bitcoin is going to help reduce bank penetration rate and also boost their economy.
- To help people who send remittance
The president of El Salvador states that El Salvador highly relies on money sent from workers abroad. He says that having Bitcoin as a legal tender will help transfer money from abroad to El Salvador easier and faster. President Nayib Bukele also noted that making Bitcoin a legal tender will help eliminate the high cost of remission associated with sending money.
Advantages of making Bitcoin a legal tender in El Salvador
Bitcoin being a natural currency, there are a lot of benefits one can get from using it in transactions when compared to other fiat currencies. As Bitcoin is made a legal tender in El Salvador, there are certain benefits that El Salvador’s people are going to enjoy. Some of these benefits are listed below
- User autonomy
The main factor that attracts Bitcoin to many users is autonomy. Digital currency gives users more freedom to their own money than fiat currencies do. With Bitcoin, the citizens of El Salvador can control how they use their money without negotiating with intermediary authorities like the government or bank.
- Low transaction for international transfers
Basic transfers and foreign purchases involve fees and exchange costs. Heretofore Bitcoin transactions have, no bank intermediate therefore, transaction cost will be quite low. The low cost of transacting bitcoin will help the El Salvadors wish to travel and still send money to their loved ones. Also, bitcoin transfer is straightforward and quick, therefore, eliminating the inconvenience and wait period.
- Elimination of bank fees
Another benefit that El Salvador citizens enjoy from bitcoin as a legal tender is eliminating bank fees. The fees charged by a bitcoin transaction are not dependent on the bank, unlike the fiat currencies. Therefore with the establishment of Bitcoin as a legal tender, there will be no need for balance fees, overdraft charges, account maintenance, etc.
Another benefit of bitcoin when it comes to security is its discretion. Unless a wallet holder openly reveals his transaction. The use of bitcoin in transacting makes you safer because when you transact, your details are not included
Since bitcoin can be transferred via smartphones, tablets, or laptops, it is readily available to every user. The use of bitcoin for transactions also saves the El Salvadors residence from stress and the cost of using the banking system.
Disadvantages of making Bitcoin a legal tender
In as much as Bitcoin has lots of benefits, it also has some disadvantages that come with it. Below are some cons of Bitcoin as a legal tender
- Highly volatile
El Salvador has two currencies that will be highly complicated. The complication begins at how will the price of Bitcoin be determined; will it be the price of the day which the law was giving or when the price fell. Hence the price of Bitcoin is not stable, and it can increase within a few days. No one will like to buy with Bitcoin when it is at a high price.
- Instability in Bitcoin
If El Salvador has chosen a stable coin and has the value of one US dollar, it would have been easier. But this would not support President Bukele’s reason for chosen a coin as big as Bitcoin. Since bitcoin has a market cap of $680 billion, and if just 1% is invested into El Salvador, it will increase their GDP by 25%
The acceptance of Bitcoin as a legal tender by President Bukele will be beneficial for the country but, it also poses future threats. The action he took on making Bitcoin a legal tender was not just to reduce the bank fees and increase the country’s economy but also to reduce the rate of money laundering by criminals.