On June 9th, El Salvador’s President Nayib Bukele announced that the “Bitcoin Law” he had written has been approved by the overwhelming majority (62/84) of the Salvadoran Congress, which means that the bill will take effect in 90 days, and Bitcoin It will also become the country’s legal tender. This means that El Salvador has become the first country in history to officially.
What is the far-reaching impact of El Salvador’s blockbuster Bitcoin bomb?
Since Bitcoin was launched as the world’s first cryptocurrency, its supporters have wildly declared that it has the ability to subvert the financial system and change the nature of the currency. However, a simpler problem has not been solved-can it play a role in the real world, for ordinary things such as buying and selling things and transferring money? El Salvador announced that it will consider Bitcoin as the legal tender, and what happens in this country of 6 million people will be closely watched for clues to the answer to this question.
1. What did El Salvador do?
The 39-year-old president of El Salvador, Nayib Bukele, gave Congress the green light for his plan, making the country the first country to use Bitcoin as legal tender. According to the bill, Salvadorans can now pay taxes in Bitcoin, and “economic agents” will be obliged to accept cryptocurrency as payment for goods and services. In this Central American country, the U.S. dollar will continue to circulate together with Bitcoin as the national currency.
2. What prompted El Salvador to make this attempt?
El Salvador’s economy suffered its worst collapse in four decades last year, while the fiscal deficit widened to more than 10% of GDP because the strict lockdown to control Covid-19 harmed business. This makes the government have to look around for new sources of funding. The Ministry of Finance is negotiating with the International Monetary Fund on a $1.3 billion expansion fund financing to help meet this year’s financing needs, but negotiations have stalled. This country is still dangerous. Booker believes that his administration’s security policies have reduced killings, but the murder rate is still four times that of the United States. The relationship between Booker and the US government has become strained by his abuse of prisoners and the dismissal of Constitutional Court judges by his political party and the attorney general for fighting corruption.
The country’s remittances account for about 20% of the country’s GDP, mostly from Salvadorans working in the United States. Bukele said that a large part of the loss is in transfer fees, and Bitcoin can help reduce these fees. El Salvador is a so-called dollarized economy, which means that the fiscal and monetary decisions of the US government and the Federal Reserve have a huge impact. The adoption of Bitcoin can make this country more independent.
Bukele said that El Salvador can become a Bitcoin mining hub, the process of verifying transactions in exchange for new coins. Bukele said in a tweet that if only 1% of Bitcoin’s circulating value ends up in El Salvador, it will increase the country’s GDP by 25%, although he did not specify the mechanism by which it might increase GDP. .
3. How will Bitcoin be used as legal tender?
There are many things that are unclear. In theory, Bitcoin will create a payment channel parallel to the U.S. dollar. Prices can be quoted in cryptocurrencies, and exchanges that use it will be exempt from capital gains tax. The bill passed by Congress requires the establishment of a fund to ensure the convertibility of Bitcoin and U.S. dollars.
4. Can El Salvador do this?
Bitcoin mining involves complex calculations and a large amount of computing power. Due to its use of electricity and the pollution it causes, it has been criticized more and more. Booker said on Twitter. “I just instructed the president of our state-owned geothermal power company to propose a plan to use the very cheap, 100% clean, 100% renewable, and zero-emission energy provided by our volcano to provide facilities for #Bitcoin mining.” Whether it is successful or not, this move must be in line with Booker’s attempt to portray himself as a new Latin American leader. Among other things, he is also known for communicating through Twitter, surfing, and wearing a baseball cap from the back to the front. In his photos on Twitter, he even adopted the “laser eye” pattern popular among cryptocurrency enthusiasts.
5. Why is this a novel experiment?
Bitcoin is used for some transactions in some places. For example, it has been used informally in parts of El Zonte, the beach town of El Zonte, where there are two Bitcoin ATM machines, and more than 30 companies have accepted this encryption. Currency payment. But its volatility-its price volatility-makes many companies reluctant to use it. Since mid-April, it has lost nearly half of its value. Many companies are unwilling to accept payment today in a currency that will be less valuable tomorrow, even if it may be more valuable. Even in technology centers like Silicon Valley and Singapore, the use of Bitcoin as a medium of exchange is still trivial. On the other hand, in El Salvador, the government and central bank are actively promoting its use, which may drive its adoption.
6. What other risks are involved?
Cryptocurrencies have a long history of hacking, and Bitcoin can be “lost” by users because they misplaced the code identifying them as the owner. Widespread adoption may also make El Salvador a tax haven–or money laundering paradise. If it does attract Bitcoin’s “whales”, known as Bitcoin giants, to transfer their coins to El Salvador, then the repetition of the boom and bust price cycles that Bitcoin often goes through may have a negative impact on this $27 billion. Economies have disastrous consequences.
7. What does this mean for the Bitcoin community?
In recent years, Bitcoin has attracted increasing interest from mainstream financial companies, who believe that cryptocurrency is a potentially profitable new field. But a basic problem has not been solved. Is Bitcoin primarily a tool for financial transactions, just like the U.S. dollar and other traditional currencies? Or is it something worth buying because it is a store of value, and like gold, compared to many other assets, it has a less direct relationship with the economic cycle? What happens in this country of 6 million people will be closely watched for clues to the answer to this question.
8. Are other countries doing this?
The analysis pointed out that this is not the case. Many central banks are developing their own digital currencies, but these digital currencies are far from cryptocurrencies such as Bitcoin. Bitcoin owners value their independence from the government. For example, the Bahamian sand currency is just a branch of the Bahamian dollar, and one-to-one transactions are conducted with it.
Domino effect: After El Salvador and Paraguay, which countries will adopt Bitcoin?
El Salvador and Paraguay have both expressed their intention to support Bitcoin. But as @GaryLeland pointed out, Brazil and Panama have also announced their interest in following suit.
This begs the question: Which other countries are also planning to adopt Bitcoin? More importantly, given the mainstream aversion to leading cryptocurrencies, why does this happen?
Will El Salvador become the first country to officially adopt Bitcoin?
El Salvador’s President Nayib Bukele threw a blockbuster on Saturday. He said he will introduce a bill to Congress this week to formally adopt Bitcoin as legal tender.
If successful, El Salvador will become the first country to officially use cryptocurrency to attract investment and enable more residents to participate in the formal economy.
Soon, Buckler released another tweet, redoubled his emphasis on no capital gains tax on Bitcoin, and immediately provided permanent residency for cryptocurrency entrepreneurs.
Cryptocurrency enthusiasts, including Binance CEO Changpeng Zhao, expressed their approval and expressed interest in moving there.
Buckler came forward to say that he supports Bitcoin for many reasons. The most important reason is that Bitcoin can improve economic prosperity and financial inclusion in a country where 70% of people do not have access to banks or credit.
It is worth noting that 20% of El Salvador’s gross domestic product (GDP) comes from money sent home by immigrants. This brings additional international transfer fees and remaining inefficiencies, which sometimes means that funds can take several days to settle.
Printing money has consequences
Another reason why El Salvador agrees with Bitcoin comes from the Federal Reserve’s money printing policy, which has been rampant for more than a year.
“The Federal Reserve has significantly increased the supply of U.S. dollars in circulation, as measured by the M2 currency stock, from 15.35 trillion U.S. dollars in February 2020 to 20.26 trillion U.S. dollars in May 2021. This is a 32% increase in the U.S. The history of the modern peace period is unprecedented.”
Although this helped alleviate domestic economic pain, countries like El Salvador suffered a loss of purchasing power due to currency inflation in the United States.
The Federal Reserve showed no signs of relaxing its money printing policy. By officially legalizing Bitcoin, Buquerer hopes to stabilize El Salvador’s economy. Buckler said that in this case, it is necessary to authorize a private digital currency independent of the control of any central bank to reduce risk.
As for which country will officially adopt Bitcoin in the future, based on the above, it should be every country affected by US currency inflation.
Bitcoin master Anthony Pompliano said on Twitter that Senator Indira Kempis of the Republic of Mexico posted a photo of his own laser eye.
According to the relevant news from all countries that support Bitcoin in recent days, it is clear that there will be major moves in Latin America next.
