Money talks, often in metaphors. Today, El Salvador became the first country to adopt bitcoin as legal tender, allowing residents to pay all public and private debts in the cryptocurrency. It’s a policy without precedent in the world, and one that symbolizes the beginning of a new period of national self-determination for the country.
Proposed by President Nayib Bukele and passed by the Legislative Assembly of El Salvador in June, the law puts BTC on level footing with the U.S. dollar, which has been the country’s national currency since 2001. The move is meant to improve Salvadoran’s access to financial services and reduce the Central American nation’s dependence on the U.S. economic regime.
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In particular, Bukele has said bitcoin adoption is aimed at mitigating the inflationary pressure of fiat currencies, especially after the unprecedented bout of U.S. government spending throughout the coronavirus crisis. The coming years will be uncharted territory for El Salvador, bitcoin and – in a real sense – the U.S. dollar.
There’s no guidebook to how technology will develop, and no one knows where the Bitcoin Law will lead. In a nation where remittances account for about a quarter of gross domestic product, bitcoin infrastructure could significantly reduce fees for expatriates sending money home.
The government’s Chivo wallet, slang for “cool,” may end up being something of a savings account for the two-thirds of Salvadorans that currently lack banking access. (Qualified citizens will receive a $30 BTC airdrop when they sign up.)
But the policy could also go disastrously wrong. The IMF has warned about potentially destabilizing effects (such as on the government’s tax revenue), Moody’s has downgraded El Salvador’s debt rating and locals have raised concerns about money laundering or corruption in a nation that struggles to deal with organized crime.
Bitcoin is also a highly volatile currency, with some deflationary properties, making it less-than-ideal for daily use. (Though that hasn’t stopped people in El Zonte, a fishing village in El Salvador that has become something of a proving ground for semi-closed bitcoin economies.)
Still, in taking this step, the government is signalling its commitment to financial innovation. Last month it began installing a network of 200 bitcoin ATMs around the country. It’s working to build infrastructure on top of the Algorand blockchain. And its bid to attract foreign investment and crypto talent seems to be paying off.
Others view the Bitcoin Law as an extension of Bukele’s hipster-authoritarian tendencies. Cato’s George Selgin and Steve H. Hanke and prominent bitcoin advocates including Nic Carter have roundly criticized Article 7 of the law, which compels businesses to accept bitcoin. The Financial Times’ editorial board have called the law a “dangerous gamble,’’ based on the compelling argument that bitcoin is “not cool” as legal tender.
No matter what the Bitcoin Law represents, this is a matter of national sovereignty. To me, the bitcoin law may be the clearest symbol that the age of American interference in and determination over Latin America should come to an end.