Reuters reports that El Salvador has become the first country in the world to adopt Bitcoin as legal tender. The cryptocurrency will now be El Salvador’s second official medium of exchange, alongside the U.S dollar, which will remain its primary currency. El Salvador’s government announced that it will guarantee Bitcoin’s convertibility to the dollar and all of the country’s merchants are now required to accept it as a payment method (except those that don’t have the technical means to do so).
El Salvador’s President Nayib Bukele is touting the move as a way to streamline cross-border remittances from Salvadorans working abroad and expand financial inclusion to the 70% of Salvadorans that lack access to traditional financial services. According to a 2018 report by the UN Economic Commission for Latin America and the Caribbean, remittances from the Salvadorian diaspora in the U.S amounted to almost $5.5 billion annually, comprising 21% of El Salvador’s GDP.
The embrace of Bitcoin is also expected to encourage the development of broadband internet access and other digital infrastructure in underserved regions of the country.
Some observers are however voicing concern about the implications this may have for El Salvador’s ongoing negotiations with the IMF regarding a $1 billion financing program. Others are expressing concern about what this means for money laundering and tax dodging tactic, which are notoriously easier to deploy when transacting in cryptocurrencies.
It is also unclear how Salvadoran merchants are going to react when forced to accept payments in such a volatile currency and how many of them will have the technical means to comply with the mandate.
It remains to be seen whether transacting in Bitcoin lends some much need stability to El Salvador’s economy or if it is simply an attempt by the government to create a semblance of progress by riding the crypto hype wave. In any case, this delivers great encouragement to Bitcoin investors and cryptocurrency enthusiasts as it will likely boost demand for the coin and contribute to the already ubiquitous buzz about an impending crypto revolution.
It is no surprise that Bitcoin’s price is already up by over 10% compared to 24 hours prior, at the time this article was written.
Overview by Sam Klebanov, Research Analyst at Mercator Advisory Group