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On June 9, El Salvador’s legislature voted to make bitcoin legal tender across the country. (Photo by STANLEY ESTRADA / AFP via Getty Images)
AFP via Getty Images
On Wednesday, June 9, El Salvador’s legislature made history by officially adopting bitcoin as legal tender, with nearly three-quarters of the legislature voting in favor. If the new law works as intended, it has the potential to transform El Salvador into one of the world’s most important financial centers and affect the way people around the world use digital currencies.
History! Salvadoran President Nayib Bukele exclaimed on Twitter after the vote at around 2 a.m. EST on June 9. And, indeed, the bill is historic on several fronts.
How the Salvadoran bitcoin standard will work
According to the legislative text, under the new law, every economic agent must accept bitcoin as a means of payment when offered to them by anyone who acquires a good or a service: a simple definition of what it means to be legal tender. Tax contributions can be paid in bitcoin, along with all other legal obligations, and bitcoin exchanges will not be subject to capital gains tax like any legal tender. And many obligations expressed in US dollars, existing before the date of entry into force of this law, can be paid in bitcoin.
The US dollar will also be legal tender in the country and will be used as the base currency for accounting purposes.
The bill anticipates many practical considerations related to the adoption of bitcoin as legal tender.
First, the law creates exceptions for those who do not have access to technologies that will allow them to conduct bitcoin transactions. The Salvadoran government will promote the training and mechanisms necessary for the population to access bitcoin transactions.
Second, the Salvadoran government will establish a $ 150 million trust with the Development Bank of El Salvador (Banco de Desarrollo de El Salvador, or BANDESAL), which will exchange the bitcoin that businesses and individuals receive in U.S. dollars to market price, for those who don’t want to hold bitcoin. This way, bitcoin adoption will grow organically across the country, and those who find bitcoin volatility too risky won’t have to keep it on their balance sheets.
The purpose of the trust fund is not to make money, but to support this decision to have bitcoin as legal tender, President Bukele said in a conference call on Twitter Spaces hosted by Nic Carter of Castle Island Ventures. It does not involve the [U.S.] Federal Reserve or even our central bank.
Third, while Salvadorans will be free to use any compatible wallet to interact with the new bitcoin-based monetary system, they will have the option of using an official government-approved smartphone wallet designed by Jack Mallers. Strike.
Strike helped launch the use of bitcoin in El Salvador; its Lightning Network-based backend enables fast transactions with minimal fees: essential functionality for everyday payments in a low-income country. (In the United States, professional football player Russell Okung used Strike to convert his Carolina Panthers paychecks to bitcoin.)
A monetary version of disruptive innovation
The late Harvard Business School professor Clayton Christensen coined the term disruptive innovation to describe innovations that originate in a niche market that may seem unattractive or inconsequential to incumbents in the industry, but which end up redefining an industry. Think about how low-cost Japanese automakers like Honda and Toyota entered the US market with reliable, affordable, low-margin compact cars, and eventually made their way into the higher-margin luxury segment. with Acura and Lexus. The Detroit Big Three initially ignored and mocked Japanese cars, but eventually lost market share and demanded federal bailouts to stay afloat.
What El Salvador is doing with bitcoin follows exactly the same pattern. Many people in the US and Europe scoff at bitcoin, criticizing its volatility and high transaction costs, believing that the US dollar and the euro work perfectly, without the need for alternatives.
Remittances represented 20.8% of El Salvador’s GDP in 2019.
Visual capitalist
El Salvador sees it differently. A bitcoin currency standard, supported by the Lightning Network, allows Salvadorans living in the United States and elsewhere to send money home without the significant fees common to Western Union and other international issuers. If all Salvadoran emigrants used the Lightning Network for remittances, an additional $ 1 billion could be pumped into the Salvadoran economy each year.
Additionally, smartphone interfaces like Strike allow easy transfer of funds, denominated in dollars or bitcoins, for everyday purchases like groceries. As noted above, under the new Salvadoran system, traders can instantly convert received bitcoin back to dollars, or keep bitcoin in their accounts if they prefer.
Salvadorians first piloted this system in the El Zonte Bitcoin Beach project, and it was a success. In an insightful interview with Stephan Livera, Bitcoin Beach founders Michael Peterson and Nicolas Burtey described how their wallet design evolved to meet the needs of low-income Salvadorans.
Transaction costs [with the base layer Bitcoin network] continued to gain momentum. And we were seeing transaction costs of $ 3, $ 4, we knew we had to change something or it just wasn’t going to be sustainable, Peterson said. This issue prompted Peterson and Burtey to deploy the Lightning Network at Bitcoin Beach, thereby eliminating the problem of high transaction fees.
Over time, if Salvadoran bitcoin law is successful, the country will have proven for the first time that bitcoin can be deployed by a sovereign nation-state both as a store of value, like gold, and also as a medium of exchange for daily transactions. .
Once El Salvador demonstrates that bitcoin is usable in this way in a low-income country where 70% of residents do not have a bank account, the nation will have proven that bitcoin is usable everywhere, including states. -United.
El Salvador is dotted with active volcanoes whose geothermal energy can be used to mine bitcoin. (Photo by De Agostini via Getty Images)
By Agostini via Getty Images
Zero carbon bitcoin mining in El Salvador
One of the most interesting things to come out of Nic Carters Twitter Spaces call with President Bukele was the opportunity to make El Salvador a center for zero carbon bitcoin mining. Elon Musk and other Bitcoin critics have argued that the computing power used to secure the Bitcoin network excessively increases atmospheric carbon dioxide.
Coincidentally, El Salvador is rich in clean, carbon-free geothermal energy. Almost a quarter of electricity in El Salvador is produced from volcanic heat which does not require the use of fossil fuels. Two-thirds of El Salvador’s geothermal energy remains untapped: enough to power 3-4% of the global Bitcoin network.
During the call, Bukele was asked whether or not El Salvador was interested in establishing bitcoin mining facilities in the country. He said the thought hadn’t occurred to him before, but the idea had substantial potential:
We have a plan, it has nothing to do with bitcoin, but we have icivolcanoes geothermal energy [that turn] water into water vapor and that makes energy. So we produced this energy [beginning] 50 years ago. But we waste a lot of energy transporting energy from geothermal power plants to cities. We therefore want to promote these industrial parks on the outskirts of factories, where you can set up your factory and you will receive cheap, 100% clean, 100% renewable, 0% CO2 emissions. [energy]. And we wanted to do it not because of bitcoin, but because people want to invest in factories that won’t have [a] carbon footprint Probably someone wants to set up a [bitcoin] mining with cheap, clean and renewable energy.
Sure enough, later that day on June 9, Bukele tweeted that he had asked the chairman of LaGeo, the state-owned geothermal energy company, to put in place a plan to offer facilities for bitcoin mining. with a very cheap, 100% clean, 100% renewable, [zero-emissions] the energy of our volcanoes.
Energy costs are the biggest expense for bitcoin miners; in El Salvador, miners could generate significant income for the country and significantly reduce the cost of electrifying rural areas.
Will other countries follow El Salvador’s example?
In response to the bitcoin movements in El Salvador, politicians in several other Latin American countries have expressed their desire to bring a bitcoin standard to their country. The first was Carlitos Rejala from Paraguay, who hinted on Twitter that Paraguay was working with PayPal on such a project.
Panamanian lawmaker Gabriel Silva followed, tweeting, It’s important. And Panama cannot be left behind. If we want to be a true technological and entrepreneurial hub, we must support cryptocurrencies. We will prepare a proposal to present to the [legislative] Assembly. If you are interested in building it, you can contact me.
Lawmakers from Brazil, Mexico, Colombia and Argentina quickly followed suit. None of these figures have the same influence in their governments as President Bukele in El Salvador, but some of them could very well succeed in following El Salvador’s example, creating a multinational consortium of countries deploying bitcoin as a currency. legal.
Even if other countries do not follow El Salvador’s lead, the fact that a single sovereign nation-state would adopt bitcoin as legal tender is of great importance.
Salvadoran Bitcoin Law creates what Bukele calls a crypto sanctuary country, a secure and predictable legal environment for Bitcoin entrepreneurs to create new and innovative tools. This environment will attract many of the industry’s most talented and creative people to El Salvador, enriching native Salvadorians and accelerating the development of a more inclusive global financial system.
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