El Salvador has become the first country in the world to make bitcoin official tender

 

After Congress approved President Nayib Bukele's request to embrace bitcoin as legal tender, El Salvador became the first country in the world to do so.

Despite concerns about the potential effects of El Salvador's agreement with the International Monetary Fund, lawmakers voted 62 out of 84 times in favor of the initiative to develop legislation to accept bitcoin.

Bukele has praised the usage of bitcoin for its potential to aid Salvadorans residing abroad in sending remittances home, while simultaneously stating that the US dollar will remain legal cash.

"It will bring financial inclusion, investment, tourism, innovation, and economic prosperity to our country," Bukele said in a tweet just before the vote in Congress, which his party and allies dominate.

Individuals will have the option of using bitcoin, and the government would guarantee convertibility to dollars at the moment of transaction through a trust established at the country's development bank BANDESAL, according to Bukele.

Bitcoin must be accepted by businesses when it is offered as payment for goods and services under the law. Cryptocurrency can also be used to pay tax contributions.

In 90 days, it will be used as legal money, with the bitcoin-to-dollar exchange rate determined by the market.

Supporters of cryptocurrency applauded the action as a step toward legitimizing the new commodity, but its influence on bitcoin legislation, taxation, and acceptance in other nations has yet to be determined.

Nonetheless, there were no indicators that other governments would follow El Salvador's lead in adopting bitcoin.

"The only history will tell us whether this is the start of a trend that snowballs, or whether this is just a blip," said Brandon Thomas, a partner at consultancy company Grayline Group.

Analysts have also suggested that the decision might stymie talks with the IMF, where El Salvador is seeking a $1 billion loan.

Bitcoin had its strongest day in two weeks, climbing as high as 6% to $35,200.

"At this point, the market will be focusing on El Salvador's acceptance and whether other countries follow suit," said Richard Galvin of crypto fund Digital Asset Capital Management. "Over the next two to three years, this might be a major stimulus for bitcoin."

TRANSFERS OF MONEY

Emerging markets, where bank penetration is lower than in industrialized ones and reliance on international money transfers is higher, have embraced cryptocurrencies swiftly.

According to BofA, the countries with the biggest crypto production and trade volumes outside of the United States are all emerging nations, including China, Colombia, and India.

However, it cautioned that the usage of digital currencies in general can represent a concern to dollarized economies that have embraced other currencies as legal currency, such as El Salvador.

Dollarization "is a serious challenge for economic and financial stability in many emerging nations," according to David Hauner of BofA. "It could get worse if digitization enables access to foreign currencies."

"High local inflation is the primary cause of dollarization, which could exacerbate if digital currencies prove to be inflationary."

El Salvador is significantly reliant on money sent back from foreign labor. According to World Bank figures, remittances to the country totaled about $6 billion in 2019, accounting for over a fifth of GDP, one of the highest percentages in the world.

It is unknown what percentage of remittances made to El Salvador are in bitcoin.

In theory, Bitcoin provides a rapid and inexpensive means to transmit money across borders without relying on remittance companies, which are commonly utilized for such transactions.

However, financial regulators and policymakers are concerned, claiming that bitcoin aids money laundering and other illegal activities.

Even yet, its use for remittances is sporadic. Converting local currencies to and from bitcoin frequently requires the use of unofficial brokers, whereas trading frequently necessitates technical expertise.

According to Bukele, 70 percent of El Salvador's population lacks access to standard banking services.

According to the law, El Salvador would promote training and systems to facilitate access to bitcoin transactions.