Bitcoin Becomes a Legal Tender
Bitcoin Buys Bread!
Bitcoin finds itself in the news again, but this time not due to the volatility of cryptocurrency trends in the stock market! No, this time Bitcoin has presented itself in the digital wallets of El Salvador’s residents as official legal tender. It's been a little over a month since El Salvador adopted the Cryptocurrency on as legal tender in the country.
Why is El Salvador making the move to Crypto?
Among hope that Bitcoin would spur investment in the country, El Salvador’s President, Nayib Bukele also considered the large portion of residents not able to utilize “traditional financial services.” Some 70% of citizens lack access to even a basic bank account. The reliance on holding cash is risky and results in complications in maintaining a savings or accumulating any kind of wealth, which negatively impacts the quality of life for Salvadorians.
Under these changes, Salvadorans will be able to manage their bitcoin using a simple software app, which holds safeguards like PINs, passwords, and biometric mechanisms (face recognition or fingerprint scanners).
“My dream would be that El Salvador will transit its way from the Third World to the First World.” Bukele stated as a response to questions on how this change will impact his country (translated).
Access to a safe place to manage finances means not only generate the ability to build wealth, but Salvadorans will also be able to opt to spend Bitcoin alongside the national currency (USD) to purchase everything from a gallon of milk to paying taxes and debts.
In with Crypto – out with the USD?
Though El Salvador is making history in adopting, their current currency, the US Dollar, will remain as the nation’s reference currency. There are laws protecting businesses and organizations that do not have that technology to accept cryptocurrencies. In 2001, El Salvador moved to the USD as their reference currency to be used in areas like accounting and reporting, which will remain in effect moving forward.
Along with the technical updates to storefronts and businesses, there have also been a few IT hiccups to overcome during the rollout. Officials had to increase the capacity of the image capture servers to appropriately manage the cryptocurrency use only a few days after the launch.
Large scale technical launches are likely to have issues requiring service and maintenance, however, the turbulence has not helped to settle the concern of Salvadorans. The population of El Salvador is divided, as many of the country’s citizens are uncomfortable with this unprecedented shift into cryptocurrency.
For the first time since Bukele took office in 2019, the country’s citizens took protest to these changes. While the protests remained largely peaceful, at least one Bitcoin ATM was defaced and torched. Protesters feel that the risk to Salvadoran people and the stability of the economy is too high a price to pay for this bold move by President Bukele.
Remittance and Crypto
Currently, about 20% of El Salvador’s GDP comes from payments sent home by relatives working in other countries. These types of transactions incur transaction fees, reducing the amount being received into El Salvador.
In adopting Bitcoin, President Bukele stated that the country will save $400 million a year in remittance fees. The idea is that money being sent “home” could be transferred as Bitcoin instead, lowering the transaction fees and ensuring that more money would make its way into the country.
Cryptocurrencies in Payroll
El Salvador’s Minister of Labor and Social Welfare says it’s too early to use bitcoins as compensation for wages. The question becomes, when it becomes an option, how many employees within the country will opt to receive deposits of Bitcoin into their accounts come Payday? Employers would be able to quickly pay global employees, avoid bank intermediation and delay, which ultimately, would provide employees with more freedom over their funds.
While this shift could benefit employee and employer alike, there are several things to consider from legal compliance to proper taxation — no matter where in the world this adoption takes place. There are a few companies that have considered opening their payroll to include crypto. At the beginning of the year, Twitter openly discussed the possibility of allowing for wages of their employees to be in Cryptocurrencies. However, the complexity in this new territory makes for many unforeseen challenges in compliance and taxation laws worldwide. For now, the USD will be used as the reference currency for accounting and payroll purposes.
Too soon to Follow Suit
As the world tunes into the news on El Salvador’s revolutionary move, many Latin American Countries are considering following suit in adopting Bitcoin and other cryptocurrencies as legal tender. Countries like Paraguay, Mexico, and the technology and entrepreneurship hub of Panama have shown interest and support in the Salvadoran President’s bold move.
Still, it is yet to be seen whether more countries and businesses will become more receptive to digital currency. There are plenty of opportunities as well as fears in opening the tender to cryptocurrencies — for now, the world is tuning into El Salvador for answers to their curiosities.
(70% unbanked) https://www.acuant.com/blog/the-worlds-unbanked-population/
(USD 2001) https://bitcoinmagazine.com/culture/el-salvador-bitcoin-emerging-economies
(Cheaper Remittance) https://qz.com/2058676/remittances-to-el-salvador-are-cheaper-without-using-bitcoin/
(Crypto payroll compliance) https://www.shrm.org/resourcesandtools/legal-and-compliance/employment-law/pages/payment-in-cryptocurrency.aspx