Effective September 7, 2021, El Salvador has become the first country to officially adopt Bitcoin as a legal currency. The “Bitcoin Law” was announced in June 2021 and was subsequently approved by the El Salvadoran Congress with 62 out of a possible 84 lawmakers voting in favor of this new law.
El Salvador’s President Nayib Bukele stated, “In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy.” Reportedly, over 70 percent of the country’s “active population” do not currently have a bank account. There are fears that due to the price volatility of Bitcoin, economic stability will cause greater issues within the country; however, in the long term, it is expected that the price of Bitcoin should become much more stable as there is a fixed supply of Bitcoin that will ever be created, which is 21,000,000.
This new law means citizens will be able to pay their taxes in Bitcoin and all shops will be able to display the price of goods in the new digital currency as well. Money exchanged into the currency will also not be subject to capital gains tax. This move makes El Salvador the first country to officially have Bitcoin on its balance sheet and to hold it as part of its reserves. As part of its move towards adoption, El Salvador has begun purchasing Bitcoin on the open market to build up its treasury.
Additionally, the country has been working with corporations to onboard the proper technology to accept Bitcoin as a form of payment. Companies such as Starbucks, McDonalds, and Pizza Hut were just a few of the first companies in El Salvador to accept Bitcoin starting on September 7.
Bitcoin as legal tender is the first step on the toward central bank digital currencies (CBDCs) which will ultimately be a major driver for making digital currency payments, both domestic and cross-border, become mainstream.
Bitcoin provides a great solution to be used as legal tender as it contains the three primary functions of money:
- Medium of exchange
- Store of value
- Unit of account
Bitcoin fits as a medium of exchange due to its continued adoption globally and more individuals growing interested in this new form of digital money that can be transacted with cross border payments instantaneously with no intermediary. Second, as a store of value, Bitcoin is salable across time as we continue as a society to transact in a digital format since Bitcoin does not live as a tangible good. Finally, as a unit of account, market prices can be expressed in Bitcoin, which is also assisted by the fact that Bitcoin has a fixed total supply thereby alleviating the need to constantly revalue goods based on inflation.
El Salvador has paved the way for other countries to begin using Bitcoin as a real asset. Within the last month, Cuba and Ukraine have both legalized Bitcoin and Panama has presented a bill to their Congress to legalize Bitcoin. As more and more countries continue to recognize digital currency as a form of legal tender, this emerging technology with drastically alter the way individuals take title to their own assets rather than holding funds in a third party intermediary (i.e. financial institution).
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