El Salvador becomes the first country to adopt bitcoin as legal tender after its lawmakers voted overwhelmingly in favor of the proposal.

El Salvador President Nayib Bukele’s proposal to make bitcoin legal tender in the country was greenlighted by its lawmakers on Tuesday night by a solid 62/84 majority. El Salvador does not have a currency of its own and uses the US dollar as its official medium of exchange. Now, bitcoin too will function as legal tender alongside the dollar, and every business must accept it as payment. (BBC)

The law passed by the El Salvador Congress says: “The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.”

El Salvador and bitcoin

The move is likely to make it easier and cheaper for Salvadoreans working abroad to remit funds to their families at home.

El Salvador’s economy has an outsized dependence on inward foreign remittances which make up about a fifth of the country’s GDP. Over two million Salvadoreans send back more than $4 billion annually to El Salvador.

Additionally, according to President Bukele (pictured above), the move will bring “financial inclusion, investment, tourism, innovation and economic development for our country.”

Now establishments can display prices in bitcoin, the government will accept tax payments in the cryptocurrency, and transactions will not be subject to any capital gains tax.

However, the law on bitcoin will only become effective in 90 days.

Furthermore, the law says that the exchange rate with the US dollar “will be freely established by the market.” Moreover, according to Bukele, “the government will guarantee the convertibility to the exact value in dollars at the moment of each transaction.”

The mechanism for this is said to be through a trust created at BANDESAL, the country’s development bank.

Technical issues

However, there could be technical bottlenecks such as hardware and internet availability. The statute approving bitcoin says in this regard that the state will “promote the necessary training and mechanisms so that the population can access bitcoin transactions.”

On Monday Bukele sent out a tweet confirming that the country will build a satellite infrastructure for its citizens in rural areas to connect to the internet and the bitcoin network in places where connectivity is poor.

Moreover, Bukele announced last week El Salvador’s partnership with digital wallet company, Strike, to build the country’s modern financial infrastructure using bitcoin technology.

Analysts express reservations

The move to adopt bitcoin as legal tender by El Salvador may not go down well with IMF with whom the country is negotiating a $1 billion program.

Furthermore, it may encourage tax avoidance and hurt the country’s revenue collection. “Cryptocurrencies are overall a very easy way to avoid taxation and a very easy way to simply avoid the authorities because it’s a completely decentralized system, you can do money laundering, you can do tax avoidance and so on,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management, to Reuters.

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Image of President Nayib Bukele: Wikimedia Commons