How Salvadoran Bitcoin Law Can Change Global Finance – Cointelegraph Magazine

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Obviously, the thing that transforms is not the technology that technology transforms you. Jeanne Ross, formerly of the MIT Sloan Center for Information Systems Research

If Salvadoran Bitcoin Law was the shot heard around the world for Bitcoin, then when the International Monetary Fund (IMF) and the World Bank challenged the legislation, it was the incumbent empire that fought back. .

However, if El Salvador can implement its Bitcoin law despite many technical and legal hurdles, it can force changes on organizations that oppose it and accelerate reforms in how US tax and trade laws deal with it. cryptocurrencies.

The surprise shot heard around the world

After obtaining qualified majority approval from its congress, El Salvador enacted its Bitcoin Law and became the first country in the world to adopt Bitcoin as legal tender. The Bitcoin law was passed just days after the President of El Salvador, Nayib Bukele, first announced his intention to introduce it. The short time between Bukeles’ surprise announcement and the passage of the Bitcoin law prevented opponents from blocking it.

However, in a series of premonitory tweets, Avanti Financial Group CEO and Bitcoin advocate Caitlin Long predicted a big fight over the Bitcoin law and warned the world was about to put pressure on it. [El Salvador] given what is at stake.

1 / SUBJECT OF A HISTORIC DAY in #bitcoin: the president of # ElSalvador has publicly announced his support for legislation aimed at making #BTC legal tender. * IF * it becomes law, it will have many side effects. Get ready for a big fight over this probably coming soon https://t.co/BrrNxaLzpZ

– Caitlin Long (@CaitlinLong_) June 6, 2021

Leverage and IMF loan pools

Indeed, in the aftermath of El Salvador’s adoption of the Bitcoin law, the IMF claimed that the legislation raised a number of macroeconomic, financial and legal issues that require in-depth analysis. The World Bank, which frequently cooperates with the IMF, has joined the fray and has proclaimed that it has rejected El Salvador’s request for help in implementing its Bitcoin law due to shortcomings in the matter. environment and transparency. While these proclamations from powerful Washington, DC-based multinational organizations embody the fight Long predicted in his tweets, the forward momentum of Bitcoin laws may accelerate reform of how these organizations and laws in the United States. discuss cryptocurrency.

Based on its founding documents, the IMF is more likely to resist the Bitcoin law by exerting economic pressure than by legally challenging the legislation of a sovereign nation. IMF member countries, including El Salvador, are bound by a code of conduct enshrined in the IMF’s Articles of Agreement.

These articles require members to allow their currency to be exchanged for foreign currencies freely and without restriction, to keep the IMF informed of changes in financial and monetary policies that will affect the economies of other members, and to modify their policies to meet the needs of the world. all members. The IMF administers a cash reserve from which its members can borrow to help countries adhere to the code of conduct of its statutes. In other words, the IMF enforces its statutes by accessing its pool of loans.

Given that El Salvador seeks a loan of $ 1.3 billion from the IMF to revitalize its economy, the IMF may attempt to restrict or suspend this important financing on the basis of the articles of the agreement. For example, the IMF could argue that it was not informed enough in advance about the Bitcoin law. It could also require El Salvador to limit or change the Bitcoin law to meet the needs of all members.

However, it appears that concerns about the IMF’s punitive measures based on the issues it raised with the Bitcoin law may have been overblown. After the IMF expressed concerns, El Salvador’s Finance Minister Alejandro Zelaya assured the IMF that the country was not abandoning the US dollar as its currency. Zelaya also said talks with the IMF are progressing well and asserted that the IMF has no problem with the Bitcoin law. The IMF did not respond to Zelayas’ remarks, so the jury is still out on what action, if any, the IMF might take in response to the Bitcoin law.

Assuming El Salvador respects its Bitcoin law, it will still need help implementing it. As drafted, the Bitcoin law only allows 90 days to implement measures to make Bitcoin legal tender in the country. While El Salvador already has a partnership with private digital wallet company Strike to build the infrastructure required for the Bitcoin law, the World Bank has flatly rejected the country’s request for assistance.

Potential Implications of the World Bank Bitcoin Law

Although the World Bank refuses to help with the Bitcoin law, an informative article by Martin Rivers suggests that the legislation could force the World Bank to accept Bitcoin. More specifically, the International Bank for Reconstruction and Development of the World Bank is governed by its founding document, its statutes. Section 12 of Article V provides that instead of accepting a member’s currency in certain cases, the Bank accepts […] Notes or similar bonds issued by the government of the member or the depositary appointed by that member.

Thus, the World Bank articles would force him to accept a note issued by El Salvador backed by its Bitcoin reserves. Section 9 of Article II further states that when the face value of holdings in a member currency appreciates, the World Bank must repay the gains. If the opposite happens, the member must bring in additional foreign currency to maintain the face value of his assets. Therefore, if Bitcoin is considered a local currency of El Salvador, the World Bank could accumulate Bitcoin or pay Bitcoin El Salvador earnings based on the price action of the cryptocurrencies.

Central American Bank for Economic Integration expresses support

Regardless of the World Bank’s stance on the Bitcoin Law, other Central American-focused banking organizations are offering to help them implement it. For example, Dante Mossi, executive chairman of the Central American Bank for Economic Integration (CABEI), said the bank will provide technical assistance to El Salvador for the implementation of the Bitcoin law.

CABEI has 15 member countries and seeks to promote economic integration and balanced economic and social development in the Central American region. Expressing support for the Bitcoin law, Mossi noted that it would reduce the cost of remittances for relatives of Salvadoran nationals living abroad. While Mossi said he is very optimistic that El Salvador is making Bitcoin legal tender, he is also calling on the government of El Salvador to develop regulations to prevent bad actors from taking advantage of Bitcoin’s pseudonymous features. .

Fast Track Reform of Tax and Commercial Law in the United States

The Bitcoin law could also force needed reform in the way U.S. tax and trade laws treat cryptocurrencies. In March 2014, the Internal Revenue Service issued a notice characterizing cryptocurrencies as property. In issuing this notice, the IRS observed that while a digital currency can function like real currency, it is not legal tender in any jurisdiction.

Now that Bitcoin is legal tender in El Salvador, the IRS may be forced to reconsider the principles it has laid out for treating Bitcoin as property for tax purposes. If the IRS were to treat Bitcoin as a traditional currency, it would require that all trading or investment gains on the asset be taxed at regular income tax rates instead of over-tax rates. favorable values. However, decentralized cryptocurrencies like Bitcoin do not fit into Treasury Department regulations that define currency as a coin or paper issued by a country.

Current tax regulations and currency definitions are unsuitable for Bitcoin as they predated the advent of blockchain technology. However, U.S. taxpayers with families or businesses in El Salvador and other countries that adopt Bitcoin as legal tender will need more clarity regarding their tax obligations.

Instead of imposing an outdated framework on Bitcoin, lawmakers and regulators should write new rules tailored to cryptocurrencies and not impose extremely complicated reporting burdens on a growing number of Bitcoin users. Creating a safe harbor for certain de minimis cryptocurrency transactions, such as the one proposed in the Virtual Currency Tax Fairness Act of 2020 presented to the House by Representative Suzan DelBene, could be a good start.

In fact, tax law already provides a safe haven for small foreign currency transactions. Specifically, 26 USC 988 (e) states that earnings from personal transactions of less than $ 200 involving foreign currency are exempt from tax. With El Salvador’s adoption of Bitcoin as legal tender, some US citizens could argue that Bitcoin is a foreign currency and that earnings from Bitcoin transactions under $ 200 are not taxable.

However, this exemption only applies to personal transactions and not to those carried out for trading and investment purposes. Thus, in the absence of tax reform, it appears that all Bitcoin transactions will continue to be taxable events. This reality will impose complicated reporting burdens on U.S. taxpayers who regularly send Bitcoin micropayments to their families in El Salvador.

While politics can delay meaningful tax reform indefinitely, legal experts who write private commercial law in the United States are already shifting to adapt to cryptocurrencies. The Uniform Commercial Code (UCC) harmonizes the laws of commercial transactions and plays a crucial role in bringing greater certainty to commercial transactions. Currently, it is questionable whether the adoption of Bitcoins as legal tender by El Salvador is making money under sections 1-201 (a) (24) and 9-312 (b) (3) of the UCC. .

This uncertainty makes it difficult to integrate Bitcoin into secure transactions under UCC. However, the Uniform Law Commission has drafted proposals for changes to UCC that specifically deal with intangible money like Bitcoin. These proposed changes clarify that security interests in intangible assets can only be perfect by establishing control over the asset.

Bitcoin adoption is forcing change

Bitcoin is now recognized as legal tender by a sovereign nation, but struggles to coexist with powerful financial organizations and laws designed for an economy that predates blockchain technology. It appears that El Salvador is making progress in implementing its Bitcoin law despite skepticism and resistance. If El Salvador implements the Bitcoin law and other countries follow its lead, Bitcoin could change the organizations that resist its adoption and accelerate the legal and financial reforms needed to manage cryptocurrencies.

This article is for general information purposes and is not intended to be and should not be construed as legal advice.

The views, thoughts and opinions expressed here are solely those of their authors and do not necessarily reflect or represent the views and opinions of Cointelegraph or Nelson Mullins Riley & Scarborough.

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