Here’s why El Salvador’s President is endorsing Bitcoin as a legal tender

• El Salvador, a country in Central America, will become the first sovereign government to approve Bitcoin as legal tender, alongside the US dollar.
• Since conventional or digital banking isn’t in reach of citizens, much of the population is disconnected, severely limiting growth prospects. Also the country is heavily reliant on remittances.
• “Financial inclusion is not only a moral imperative but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions,” President Bukele said.
• It’s worth noting that Bitcoin has flourished in countries where government authorities cannot efficiently regulate fiat currency, like Cuba, Venezuela, and Turkey.
  

El Salvador, a country in Central America, stands to create history and become the first sovereign government to approve Bitcoin as legal tender, alongside the US dollar. President Nayib Bukele has confirmed that a [Bitcoin] bill will be sent to Congress to accept Bitcoin as a legal tender within the next week.

The government has partnered with digital wallet company Strike to build and deploy the country’s modern financial infrastructure by leveraging Bitcoin. President Bukele is viewed as a rare innovator who gained popularity and won the elections in 2019. He was the first leader in 30 years to win without support from the country’s largest party. He already enjoys a majority in the legislature; hence it won’t be difficult for him to enact the new ruling.

President Bukele believes that Bitcoin will make it easier for Salvadorans living abroad to send payments home and is confident the move will positively impact its economy.

"Over 70% of the active population of El Salvador doesn't have a bank account. They're not in the financial system," Jack Mallers, founder of Strike, said at the Bitcoin 2021 conference in Miami. It’s also where the President spoke for the first time about his cryptocurrency policy via a video.

The government has clarified that it will not be entirely shifting to Bitcoin and that the US dollar will continue to be a legal tender. Trade and Investment Minister Miguel Kattan said Bitcoin was already in limited use in El Salvador and the two currencies can co-exist.

So, why is El Salvador adopting Bitcoin as a currency?

The tiny country borders Honduras and Guatemala, both having their currency -- Lempira and Quetzal. However, El Salvador adopted the US dollar as its legal tender in 2001 since it did not have its own monetary policy. Panama and Ecuador also embraced the shift.

However, the evolution had its unique problems -- the countries were overly reliant on one currency regulated by a far-off authority with no practical ground presence in the country. Since conventional or digital banking isn’t in reach of citizens, much of the population is disconnected, severely limiting growth prospects. Being a cash reliant economy, remittances constitute 20% of the country’s economy.

These remittances are subject to massive commissions and forex charges that can go up to 10%. The country loses a lot of its wealth to intermediaries and companies not associated with the local population since more than $6 billion is sent home every year.

Cryptocurrencies can help bridge this gap and enable El Salvador to adopt a digital-first approach that’s decentralised, secure, and reliable. The dollar has reached its saturation point for globalisation.

“Financial inclusion is not only a moral imperative but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions,” President Bukele said.

Bitcoin is widely used for cross-border transfers, despite its volatile value and criticism. While this may be an exaggeration, President Bukele is confident that Bitcoin can make the country more prosperous. “Bitcoin has a market cap of $680 billion. If 1% of it is invested in El Salvador, that would increase our GDP by 25%,” President Bukele tweeted.

However, doubts still loom over its success

Experts warn that Bitcoin has an existing track record of being too energy-intensive, making it uneconomical to run operations. Bitcoin can process 4.6 transactions per second, while international payments processing company Visa can do 1,700 in the same time. Due to its blockchain-based technology, Bitcoin is exceedingly harder to scale and often considered “old” in the crypto world.

Lack of any central regulation will also mean El Salvador is again betting its future monetary policy in the hands of pure market dynamics. Bitcoin has proven to be highly volatile, making it less favourable as a currency in developed countries where fiat options don’t pose significant challenges.

Although, it’s worth noting that the use of Bitcoin has flourished in countries where government authorities cannot efficiently regulate fiat currency, like Cuba, Venezuela, and Turkey. Amid surging inflation and poor macro policies, citizens have charted their own course. Small countries also don’t have the resources right now to fully consider a CBDC (Central Bank Digital Currencies) like China, leaving them with only the existing options.

If El Salvador’s strategy works out, it could pave way for many more countries to follow. Reports suggest that lawmakers in Paraguay and Panama are also considering all options.


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