The Effects of Bitcoin Becoming El Salvador's Legal Tender
- On September 7, 2021, El Salvador announced they had officially made Bitcoin their legal tender.
- El Salvador’s president, Nayib Bukele, wanted to pioneer the usage of the decentralized blockchain for everyday transactions. He believes this is the future of purchasing and consuming goods.
- The price of Bitcoin fell by 11% when El Salvador announced it as their official currency.
In June 2021, El Salvador passed a bill stating it would recognize Bitcoin as a financial commodity. On September 7, 2021, they became the first country to adopt digital currency as its legal tender. The decision came after El Salvador’s president, Nayib Bukele, wanted to become a country of the future and remove the cash transfer fees many financial services offer.
Why El Salvador Decided to Adopt Bitcoin as its Legal Tender
Each year, the country spends $400 million on remittances for the transfers made to their citizens. Wanting to find a way to get rid of the massive transfer fees spent when using services like Western Union, they decided to spend the money elsewhere, which resulted in the country purchasing a total of 550 Bitcoins.
El Salvador’s GDP for 2020 was nearly $25 billion. Six billion dollars, or almost 25%, of the $25 billion was from remittances of the immigrant population living abroad. Before El Salvador used Bitcoin, immigrants living abroad used to transfer money back home, but they had to pay transfer fees.
This process was very slow and inconvenient for all parties involved. In addition, the money sent was not equal to the funds received because the banks would take out a fee based on the transfer amount. It would also take multiple days for the transaction to go through.
Furthermore, people had to go to a bank and physically withdraw the money to gain access to the funds. This resulted in many people getting robbed because local gangs knew they needed access to a bank to withdraw the money.
General view of a Bitcoin wallet.
As a result, Bukele created a digital wallet that allowed the citizens to receive the money instantly and used by El Salvadorians around the world. In order to get people to sign up, Bukele said he would provide 30 United States dollars ($30 USD) worth of Bitcoin to each user.
What It Could Mean Going Forward
The purpose of creating crypto was so it would be decentralized, and anyone around the world could use it without worrying about exchange rates. Furthermore, as most South and Central American countries are classified as developing countries, they could use Bitcoin to improve their purchasing power and obtain more supply to improve their economy.
Specifically, for Salvadorans, the adoption of bitcoin now makes each Salvadoran national eligible to receive $30 USD worth of Bitcoin once they download the bitcoin wallet, Chivo. The Chivo wallet was created by El Salvador in order for citizens to buy, sell and transfer bitcoin, with the option to convert any Bitcoin into U.S. dollars automatically.
Positive and Negative Effects of Bitcoin as a Legal Tender
The main positive effect of Bitcoin as a currency is it will help developing countries. As Bitcoin allows international transactions to be made with the same currency, no party loses bargaining power. Keeping that power enables developing countries to access more resources to expand their economy.
However, some negative effects come with using crypto as well. For example, when the news was announced that El Salvador adopted Bitcoin as its currency, the price of Bitcoin fell by 11%. As of September 10, the digital currency has not yet recovered to its original price. Furthermore, the price has not risen as people are skeptical about how well this program will work out.
Image Credit: Guayo Fuentes / Shutterstock.com
Thousands of residents in El Salvador protested against the law that President Nayib Bukele proposed to make Bitcoin the country's legal tender.
Another major downfall of using a digital currency such as Bitcoin is that the price fluctuates daily. As Bitcoin is still in its early stages, the major announcement made by El Salvador affects its price in the short run.
Overall, Bukele’s unique approach to improving the economy of El Salvador is a bold one. Although there are many speculations about how this program could end poorly, there is room for potential. Bitcoin is the most popular form of crypto, and with the world changing every day, no one knows what will happen.