Last week, in a historic move, El Salvador became the first country to adopt bitcoin as legal tender - delighting bitcoin advocates worldwide. This came following an active bid by the country’s right-wing populist president, Nayib Bukele that was finally approved by a majority of lawmakers. Bitcoin will now be allowed for use as legal tender in the country alongside the U.S. dollar. The currency will become legal tender within 90 days.
The proposal received 62 out of 84 possible votes, counting the majority to move forward in creating the law adopting bitcoin. Shortly before this vote, Bukele tweeted “It will bring financial inclusion, investment, tourism, innovation, and economic development for our country.” Under this new law, bitcoin (with a bitcoin-dollar exchange rate set by the market) must be accepted by firms when offered as payment for goods and services, including tax contributions, or even McDonalds. Bukele shared that El Salvador would partner with digital finance company Strike in order to establish the necessary infrastructure to support the use of bitcoin as an official currency.
While El Salvador was quick to contain the COVID-19 pandemic, the World Bank shared that its economy was still hard-hit last year. As the smallest country in Central America, Bukele shared that some 70% of people in El Salvador lack access to traditional financial services in his argument for adopting bitcoin as legal tender. Bitcoin has been historically appealing to emerging economies where bank penetration is lower, and reliance on money transfers from abroad are much higher. El Salvador is one such country that relies heavily on money sent from workers abroad. As such, cryptocurrency allows a quick and cheap way to send money across borders without relying on remittances.
The reasoning for Bukele’s decision makes a lot of sense in the case of developing countries, but it is not clear whether or not this move will set off a trend or be an outlying example at this time. However, it will no doubt cause other countries to re-examine the pitfalls of their currency against cryptocurrency, while evaluating the progress of El Salvador following this move, to see how it serves the country for better or worse. For investors in bitcoin, this a solid tick of approval for the currency at a much-needed time following the recent halving of the currency’s value. Following the announcement, Bitcoin rose 6% for the first time following a 2 week decline in its value.