On Wednesday, the President of El Salvador enacted a proposal to adopt bitcoin as legal tender, making the Central American nation the first in the world to officially use cryptocurrency.
The new law says that companies must accept bitcoin as a form of payment, and the government will also allow people to pay taxes with it. The exchange rate with the dollar will be set by the market, and exchanges from dollars to bitcoins will not be subject to capital gains tax. The law was passed by a qualified majority vote of the legislature, with the consent of 62 of the 84 deputies.
President Nayib Bukele said the new law would make it easier for Salvadorans living abroad to send remittances to friends and family in the country. Some $ 6 billion last year, remittances poured into the Salvadoran economy, accounting for almost a quarter of the country’s gross domestic product. About 70 percent of Salvadorans do not have access to traditional banking and other financial services in the country, the president said. The 39-year-old executive is hoping that remittances will also become cheaper. Last year the average fees were 3 percent per transaction. Eliminating these fees would net Salvadorians an additional $ 180 million.
The country has used the US dollar as its primary currency since 2001, when the government attempted to stabilize and consolidate an economy left in ruins by a bloody 12-year civil war that ended in 1992. The government changed its accounting system to dollars and stopped printing and minting its old currency, the Colones, although it did not remove it as legal tender. People can still spend the colones in their possession at a rate fixed to the dollar.
El Salvador’s use of the dollar as its primary currency means that the country has minimal control over its monetary policy; for all intents and purposes, the US Federal Reserve wields more power. As a result, the Salvadoran government’s efforts to support the economy in times of recession must go through fiscal interventions, which require a qualified majority in the legislature. The adoption of bitcoin will not change this situation, of course, since the supply of the cryptocurrency is limited by mining rates and is ultimately capped at 21 million bitcoins.
Bukele hopes that by jumping on the bitcoin bandwagon, the country will attract investors. “#Bitcoin has a market cap of $ 680 billion,” he wrote in a Tweeter. “If 1% of it is invested in El Salvador, that would increase our GDP by 25%. This assumption, of course, relies heavily on bitcoin’s market cap, which has fluctuated significantly over the past year as the price of cryptocurrency has fluctuated sharply.
Overnight, bitcoin prices rose about 7%, although they were still around 50% of their peak in mid-April, when Tesla CEO Elon Musk criticized the consumption of energy of cryptocurrency and turned the tide by accepting bitcoin for Tesla purchases. Musk’s decision was guest in part by Ars’ coverage of a fossil-fueled power plant in upstate New York that had been bought by a private equity firm and tasked with mining bitcoin. Bitcoin’s energy consumption has skyrocketed in recent months and now uses as much energy on an annual basis as the United Arab Emirates, roughly 127 TWh per year. A single bitcoin transaction requires almost 1,600 kWh and produces approximately 746 kg of carbon dioxide.
This high power consumption is built into the design of Bitcoin, which uses proof of work (cryptographic hash calculations) to verify records and transactions on the blockchain. Other cryptocurrencies are based on or are planning to shift to other means of maintaining the blockchain, including proof of stake, which requires users who validate the chain to hold a certain amount of cryptocurrency, reducing thus energy consumption.