Nayib Bukele has made a bold and risky move towards financial freedom.
A few months ago, El Salvador became the first country in the world to adopt Bitcoin as legal tender – a bold move for a small nation. Since then, the question of practicality and accessibility has been prominent. What does this change really mean for the nation? Can it act as a sole currency? Will this create a domino effect across the globe? Let’s dissect.
In order to understand what this change means, we need to understand what legal tender actually entails, which isn’t easy – legal tender is a tricky one! The technical meaning of legal tender is quite antiquated when applied to daily life: ‘money that is legally valid for the payment of debts and that must be accepted for that purpose when offered’.
Furthermore, it is assumed that shops must accept the notes that we use as legal tender, however, it is actually quite flexible and is at the discretion of the merchant. For example, if a shop owner decided they were only going to accept payments in Pokémon cards, that would be within their rights. On the other hand, if someone was paying for a chocolate bar with a £50 note, the shopkeeper could refuse it even though it is legal tender.
In layman terms, legal tender is a recognised form of currency that can be used within a country. Therefore Bitcoin is now legal tender.
El Salvador: The New Dollar?
On September 7th, 2021, a new law in El Salvador came into force which required all businesses to accept payment by Bitcoin. President Bukele has distributed $30 worth of Bitcoin to all the country’s citizens via Chivo (state-sponsored app), installed 200 Bitcoin ATMs within the country, purchased 700 Bitcoin for the national reserve, and has begun to mine the hardest money known to man in a way that is 100% renewable. The reaction to the change was entirely mixed, as El Salvador initially adopted the US dollar as legal tender in 2001 to ensure the monetary stability that the country’s national currency (colón) had failed to deliver. This reform was massively successful as the country’s inflation rate decreased from upwards of 10% to zero since 2015.
So, the question is, why has El Salvador attempted to fix something that isn’t broken? The answer is simply, financial freedom. Bukele is striving for an independent nation with a strong economy and wants to be ahead of the game. However, issues are already arising, the most important one being that poorer citizens will be brutally left behind.
The Digital Poor: Sidelined?
The biggest problem with the new adoption and use of virtual wallet Chivo is that those who are living in rural areas have limited internet access and will not be able to use the currency. Moreover, those who are older and have less of an understanding of the subject will not know how to use the currency or be able to relate it to the cash-in-hand culture. Therefore, before El Salvador made this change, it would have been ideal to release a public knowledge campaign or ensure that people had access to the App. Albeit Bukele understands it, if the public does not understand how to use the currency and the foundations of it, surely it renders it awkward if not already otiose?
Secondly, Bitcoin is a truly volatile currency and therefore, adopting and promoting it as legal tender is a high risk and dangerous game. Unfortunately for El Salvador this risk has already materialised, the change in currency has coincided with the decision of China’s central bank to declare all cryptocurrency transactions illegal. Consequently, Bitcoin has fallen in value and the Salvadoran government has already lost $5 million on the 700 Bitcoins it purchased. Despite this, Bukele is confident in his decision and has begun mining from volcanoes that will provide 95MW of 100% clean, 0 emissions geothermal energy needed to mine the coins. This is a big reform as the main problem with Bitcoin and cryptocurrency is the reliance on fossil fuels and the effect on the climate.
Nevertheless, it is not all negative, the Salvadoran reform is one for the history books and promotes a forward way of thinking. For example, the adoption of Bitcoin offers Salvadorans a low-cost way of receiving money from family members abroad – which equates to 20% of the country’s GDP. Secondly, it provides El Salvador financial freedom from the US dollar and is a beacon of hope to their president.
The Domino Effect…
As with most things, El Salvador’s reform will create a domino effect across the globe, nations will be watching and noting their blunders and their triumphs to perfect their own strategies. It is undeniable that Bitcoin will start to become legal tender across the globe, however, nations – especially the large ones – need to ensure that their strategy is shatterproof due to the volatile and unregulated nature of the currency.
It is our prediction, that smaller Latin American nations will be the ones to follow in El Salvador’s footsteps for the same reason, financial freedom. Examples include Paraguay, Panama, Mexico and Brazil. Panama is particularly significant as the country has a reputation for surprises. Congressman Gabriel Silva demanded Panama quickly follows El Salvador’s lead tweeting, ‘this is important. And Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies.’ If Panama does become the next Bitcoin nation, the world would have no choice but to stop and take notice.
All in all, El Salvador’s move was a risky one, yet a necessary one, and now we need to watch it unfold and take notes…
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