The whole world is watching El Salvador today as the country’s bill to make Bitcoin legal tender finally takes effect. After announcing the plan at Bitcoin 2021 in June as a way to address the country’s significant unbanked population and to reduce remittance costs in the country, President Nayib Bukele’s government has had little time to prepare the country of 6.5 million people for the highly controversial move.
As Bitcoin joins the U.S. dollar as legal tender in El Salvador, confusion remains on one critical factor: are businesses obliged to accept Bitcoin?
The legislation that brought the adoption into law stipulates that as legal tender, businesses and the government must accept Bitcoin as payments for goods and services, as well as for taxes and any fines.
This position has been contradicted on multiple occasions in the past few weeks, however, as the country’s finance minister said using Bitcoin will remain “totally optional” and businesses will not incur any penalty for not accepting it. President Bukele said as much in late August when he was announcing the rollout of hundreds of Bitcoin ATMs, tweeting: “What if someone doesn’t want to use Bitcoin? Don’t download [the state-backed digital wallet “Chivo”] and continue living your normal life.”
In an interview on Monday however, a legal adviser to the president contradicted this advice again, saying businesses that refuse to make transactions with Bitcoin and use the Chivo wallet may face sanctions under the country’s Consumer Protection Law.
At this stage, the move does not have widespread support; a survey conducted shortly after the bill passed the legislature showed less than 20% of respondents approved of the bill.
Bitcoin responds
In the lead-up to the adoption, President Bukele had been keeping his Twitter followers updated on the progress. Early this morning, he announced the country had bought 200 new coins, bringing the country’s total holdings to 400 BTC, or US$20 million at press time. Following this news and particularly in light of the looming adoption, naturally, there was a great deal of noise today about Bitcoin’s price prospects.
“There are a lot of people that are quite excited about what’s happening in El Salvador … I wouldn’t look at trading Bitcoin specifically on the basis of this news,” says Ben Caselin, head of research at crypto exchange AAX. “This is all just part of the adoption process. And, for all we know tomorrow, we can see a sell-off or the day after. It doesn’t really matter in the kind of grand scheme of things.”
Caselin remains bullish on BTC however, expecting BTC to breach the US$100K mark by the end of the year. “It’s an upward motion, stay invested, you should have invested three months ago, you’ll probably have to invest again three months from now. It’s an ongoing adoption curve.”
Along with the rest of the market, Bitcoin has been making consistent ground for over a month now. While it was trading above US$52k for most of the day, in the final few hours before press time, its price dropped significantly and was trading at US$50,858 at press time.
The adoption sparked another — more decentralized — buy-up as well, with people around the world converting $30 in their own local currency to Bitcoin to celebrate the launch, in line with the El Salvadoran government’s plan to airdrop each citizen US$30 worth of BTC before Tuesday.
To address the unbanked
President Bukele has always maintained the move was made to address the country’s significant unbanked population and help reduce remittance costs in the country. El Salvador has a high population of expats working abroad, transferring money back into the country; in 2019, almost US$6 billion, or 20% of the country’s GDP, was from remittances — one of the highest ratios in the world. The cost of remittances was a constant feature of the government’s strategy in marketing the adoption.
Cryptocurrency has long been seen as an effort to address global unbanked populations by meeting many of the needs traditional banking systems overlook, such as restrictive identity requirements, a stable address and high fees. The technology has the potential to help address some of these issues in El Salvador where 70% of the country remains unbanked.
“At this stage, El Salvador’s move to adopt Bitcoin as legal tender seems to carry more of a social and humanitarian aspect over an economic one,” says Jeff Yew, CEO of Monochrome, Australia’s first fund to offer institutional-grade exposure to Bitcoin. “This move has the potential to bring greater financial empowerment to Salvadorans, local and abroad. But I am hopeful that this will shine the light on Bitcoin as an opt-in life raft for many that are not living in stable economies, or excluded from financial services.”
Perhaps because of how attractive these opportunities may be, the move has drawn the ire of several international organizations; the International Monetary Fund issued a thinly veiled warning against other countries following suit, releasing a report that found potential risks outweighed any rewards. The IMF described further adoption as an “inadvisable shortcut” to strengthening the economy through slowly integrating new financial technologies into the existing economic system.
For its part, the World Bank has also rejected El Salvador’s requests for assistance in the rollout, citing concerns over transparency and environmental impacts.
Despite these warnings and difficulties in adoption, there has been much speculation whether another country would follow the move, with particular attention resting on other Latin American countries, though no solid plans have been brought forward. Though they are all watching El Salvador with great interest, the move could prove popular with countries with high reliance on remittances or with heavy reliance on the US dollar, which dramatically reduces their capacity to enact their own monetary policy.
“Bitcoin has the power to bring financial empowerment to communities that are otherwise excluded from global financial access,” Yew said. “It will be interesting to see if similar moves were to follow in other nations, especially amongst those without a strong monetary authority.”