El Salvador Becomes Bitcoin Laboratory as First Nation to Adopt it as Legal Tender

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El Salvador Becomes Bitcoin Laboratory as First Nation to Adopt it as Legal Tender

El Salvador became the first nation to legalize bitcoin on September 7, 2021, becoming the first country to do so. The decision has made Central America the first national trial in the usage of the frequently volatile currency, which is becoming more popular among many investors and speculators worldwide. The US dollar will continue to be the country’s second most important means of exchange. 123

The price of bitcoin plummeted when El Salvador announced the action, only to rebound marginally by early afternoon Tuesday. 4

El Salvador’s Law of Monetary Integration established a fixed rate of exchange between the US dollar and the country’s monetary unit, the colon, in 2001. While the colon is still theoretically legal currency, it is no longer in circulation and is so seldom used today. 5

Key Takeaways

  • In El Salvador, Bitcoin has joined the US dollar as legal money.
  • El Salvador is the first nation to use Bitcoin in this manner.
  • The country’s president anticipates that this would increase remittances from overseas and help the economy.
  • According to critics, the use of Bitcoin would boost money laundering and other illicit activities in El Salvador.
  • The majority of Salvadorans are dubious of the new Bitcoin legislation and want it overturned.

Reasoning Behind the Move

President Nayib Bukele believes that making Bitcoin legal cash would enable many Salvadorans, 70% of whom do not have bank accounts, integrate into the formal sector. He anticipates that this action would make receiving remittances from overseas cheaper and faster for people. Remittances are a critical source of cash for his chronically indebted country. 23

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In 2020, remittances from overseas totalled $5.9 billion, accounting for more than a quarter of the country’s GDP. President Bukele claims that the usage of Bitcoin would lower yearly remittance charges by $400 million, resulting in even bigger transfers of wealth. 3

Facilitating the Acceptance of Bitcoin

The new legislation mandates that all establishments accept Bitcoin as payment. Meanwhile, the Salvadoran government would pay $150 million to a trust established to assist currency exchanges. 2

Furthermore, the government has created a digital wallet called “Chivo,” which is Salvadoran slang for “cool,” and will award residents who download it a $30 Bitcoin incentive. Salvadorans will be able to withdraw cash from 200 ATMs as well as 50 additional sites. Due of technological issues, the authorities had to take the digital wallet offline in an early setback showing Bitcoin’s hurdles. 312

The Salvadoran government has made a first purchase of 400 Bitcoins, which were worth at over $21 million at the time of purchase. 3


Many financial experts are wary about El Salvador’s decision to use Bitcoin. They point out that cryptocurrencies, such as Bitcoin, are extremely volatile, speculative assets with no physical backing, causing their value to fluctuate. “Having that dangerous exchange rate fluctuation is what El Salvador was attempting to avoid when it embraced the dollar,” cautioned Jaime Reusche of the rating agency Moody’s, which downgraded El Salvador in July in part because to the Bitcoin bill. “Clearly, there is no precedence,” he continued. 2

Taxi driver Daniel Hercules expressed concern about Bitcoin volatility, saying, “It is one of the things that scares me the most.” 3

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Meanwhile, just approximately one-third of Salvadorans utilize the Internet, and a huge proportion of the population lives in poverty. According to one recent study, the majority of respondents had little intention of utilizing Bitcoin. Another poll found that more than two-thirds of people wanted the Bitcoin legislation overturned. 32

El Salvador Is Now a Global Bitcoin Laboratory

Some observers find a curious irony in the Salvadoran government’s choice to embrace a digital currency that was created, in large part, to circumvent conventional government controls over money. Others are concerned that El Salvador is being utilized as a test subject to forward bitcoin proponents’ objectives. 2

The World Bank and the International Monetary Fund (IMF) believe El Salvador’s acceptance of Bitcoin would make the country a prominent location for money laundering and other criminal financial activities. 2

“Without strong anti-money laundering and counter-terrorism financing measures, cryptoassets can be used to launder ill-gotten gains, fund terrorism, and evade taxes,” the IMF warned in a blog post, adding that “this could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.” 3

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