El Salvador is planning to become the world’s first country to accept Bitcoin as legal tender. In a recorded announcement Saturday at Bitcoin 2021, a conference in Miami, El Salvador’s President Nayib Bukele said he planned to send a bill to Congress that would make Bitcoin payments legal in his country. The bill is likely to pass because Bukele’s party has control of the country's legislative assembly. According to CNBC, El Salvador has already assembled a team of “Bitcoin leaders” to build financial infrastructure based on the cryptocurrency for its citizens.
Why Is El Salvador Making Bitcoin Legal Tender?
The smallest country in Central America, El Salvador’s official currency is the U.S. dollar.
In his recorded message to the conference, Bukele outlined two reasons for his move. First, he says that, “In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy."
El Salvador is considered a poor country and 70 percent of its population does not have access to a bank account. On Twitter, Bukele stated that even if one percent of the world’s Bitcoin was invested in his country, it would increase the GDP by 25%. According to the World Bank, El Salvador had GDP of $27 billion in 2019.
The hope is that Bitcoin will make international money transfers cheaper and easier. This is especially important for El Salvador because remittances make up a large portion of the country's economy. In 2020 $5.9 billion, or roughly approximately 23% of the country's total economic output came from remittances. Since sending remittances often comes with substantial fees, anything with the potential to lower the cost could be of significant benefit to the Salvadoran economy.
Bukele’s second reason was more altruistic. According to him, the move was an attempt to push humanity “at least a tiny bit in the right direction.”
A Boost for Bitcoin?
El Salvador’s effort to make Bitcoin legal tender has occurred during an unprecedented time in global economic history. A global pandemic shutdown has resulted in a debilitating crisis, during which governments have been forced to take extensive measures to stimulate the economy and offer relief to their citizens.
Because its official currency is the US dollar, El Salvador is directly affected by the Federal Reserve's monetary policy. Therefore, because the Fed is tasked with keeping inflation and unemployment stable in the U.S., its polices, especially aggressive policies taken to deal with the effects of the pandemic, may not be best for the economy of El Salvador.
Bukele’s proposal for Bitcoin as legal tender is meant to reduce its reliance on the Unites States. “Central banks [like the U.S. Federal Reserve] are increasingly taking actions that may cause harm to the economic stability of El Salvador…in order to mitigate the negative impact of central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria,”.
Not surprisingly, El Salvador’s announcement was greeted with celebrations among Bitcoin enthusiasts and people in Bitcoin-related industries. Jack Mallers, founder of mobile payment company Strike, called it a “shot heard around the world for Bitcoin." His company is partnering with the Salvadoran government to build financial infrastructure.
But the celebrations failed to revive investor enthusiasm for the cryptocurrency. Unlike in the past, when positive news developments bumped Bitcoin price upwards, Bukele’s announcement failed to move the dial. The cryptocurrency’s price, in fact, fell by 7.4% to $34,999 by Saturday evening from its Saturday morning. One factor in the fall may have been Elon Musk's negative tweets about Bitcoin last Thursday.