SAN SALVADOR: El Salvador became the first country in the world to adopt bitcoin as legal tender after Congress on Wednesday approved President Nayib Bukele’s proposal to adopt the cryptocurrency, a move that thrilled supporters of the currency .
With 62 out of 84 possible votes, lawmakers voted to create a law to adopt bitcoin, despite concerns about the potential impact on El Salvador’s program with the International Monetary Fund.
Bukele touted the use of bitcoin for its potential to help Salvadorans living abroad send money home, while claiming that the US dollar will also continue to be legal tender. El Salvador does not have its own currency.
“This will bring financial inclusion, investment, tourism, innovation and economic development for our country,” Bukele said in a tweet shortly before the vote in Congress, which is controlled by his party and its members. allies.
In an idea he seemed to have developed overnight, Bukele later said he tasked state-owned geothermal power company LaGeo with developing a plan to offer bitcoin mining facilities using the renewable energy from the country’s volcanoes.
He said the idea was to build a bitcoin mining hub around the country’s geothermal potential. He also said that El Salvador will offer citizenship to people who have proven that they have invested in at least three bitcoins.
The use of bitcoin will be optional for individuals and will not pose risks to users, said Bukele, with the government guaranteeing convertibility into dollars at the time of the transaction through a $ 150 million trust created. with the country development bank BANDESAL.
By law, bitcoin must be accepted by businesses when offered as payment for goods and services. Tax contributions can also be paid in cryptocurrency.
“If you go to a McDonald’s or whatever they can’t say we’re not going to take your bitcoin, they have to take it by law because it’s legal tender,” Bukele said in a conversation. line he had with the cryptocurrency industry. figures parallel to the debate in Congress.
Its use as legal tender will begin in 90 days, with the bitcoin-dollar exchange rate set by the market. Bukele said the government and the Central Bank currently do not hold any bitcoin.
Cryptocurrency supporters hailed the move as legitimizing the emerging asset, but its impact on the regulation, taxation or adoption of bitcoin in other countries remains to be seen.
There was no immediate sign that other countries would follow El Salvador’s adoption of bitcoin.
“Whether this becomes the first of what becomes a trend and then snowballs, or if it will be a fender-bender, we’ll only know through history,” said Brandon Thomas, partner at Grayline Group consulting firm .
Analysts also said the move could complicate talks with the IMF, where El Salvador is seeking a program worth more than $ 1 billion.
Bukele said he would meet with the IMF on Thursday to discuss the bitcoin law, among other matters. He said that in organizing the meeting he tried to explain to them that the change “is not going to change our macroeconomics”.
Bitcoin had its best day in two weeks, rising 6% to $ 35,200.
“The market will now focus on adoption across El Salvador and whether other countries will follow suit,” said Richard Galvin of crypto fund Digital Asset Capital Management. “This could be a key catalyst for bitcoin over the next two to three years.”
It was not immediately clear how long Bukele had been working on the bitcoin plan, but he said on Wednesday he was inspired by a project called Bitcoin Beach that brought cryptocurrency to a beach town in El Salvador the year. last.
He worked on the idea with Jack Mallers, CEO of Strike, a digital wallet that uses the Lightning Network to enable small payments in Bitcoin.
Bukele also highlighted a tweet from 2017, before he was a presidential candidate, in which he suggested using bitcoin.
Emerging economies – where bank penetration is much lower than in developed countries and reliance on money transfers from abroad much higher – have quickly warmed to cryptocurrencies.
Outside of the United States, the countries with the highest crypto production and trading volumes are all developing countries, according to BofA, including China, Colombia and India.
Bukele says about 70 percent of El Salvador’s residents do not have access to traditional financial services.
But the use of digital currencies in general can also pose risks to dollarized economies, analysts say.
“The root cause of dollarization is high local inflation, which could also worsen if digital currencies prove to be inflationary,” said David Hauner of BofA.
El Salvador relies heavily on the money sent back by workers abroad. World Bank data showed that remittances to the country amounted to nearly $ 6 billion, or about one-fifth of GDP in 2019, one of the highest ratios in the world. Cryptocurrency offers, in theory, a fast and inexpensive way to send money across borders without depending on the transfer companies typically used for such transactions. It is not known what proportion of remittances sent to El Salvador are in bitcoin.
The conversion of local currencies to and from bitcoin often relies on informal brokers, while trading often requires technical knowledge.
El Salvador will promote training and mechanisms to allow access to bitcoin transactions, according to the law.
Financial regulators and policymakers warn that bitcoin facilitates money laundering and other illicit uses.
Bukele brushed aside the fears, saying criminals are already using US dollars and other assets to launder money.
“The problem isn’t the dollar, it’s the criminals,” he said.