On June 9, the small Latin American nation of El Salvador declared that it would adopt Bitcoin as a legal tender within the country parallel to the US dollar. Just 3 days later on June 12, this bill was passed into law by a majority vote in the legislative assembly. Starting on September 7, 2021, Salvadorian citizens will be able to pay taxes, repay debts, and shop using bitcoins. This is a historic event for the bitcoin industry and for small, dollarized nations in the global south that may want to decouple themselves from the US dollar in the future. In this essay, I briefly analyze El Salvador's reasons to introduce bitcoin as a legal tender and address the two most prevalent criticisms of this law.
Can El Salvador use Bitcoin to become a small country miracle like Luxemburg or Singapore?
2 million out of the 6.5 million Salvadorans live and work abroad. They also send remittances home the total of which is estimated to be approximately $4 billion annually. However, 70% of the country’s population does not have access to bank accounts, and collecting the remittance money is extremely costly, incurring an average of 5-9% fees. Bitcoin offers a cheap and reliable way to send money across borders without relying on traditional financial institutions such as banks and remittance companies. I believe this legislation could act as a disruptive innovation allowing El Salvador to profit from cutting down on transaction fees. Bitcoin as a legal tender will also not be taxed as a capital gain which could act as a huge attraction for crypto entrepreneurs. El Salvador would become a sanctuary country with a predictable legal environment for entrepreneurs, increasing foreign investment in the country. Another significant pro is that if done correctly, this legislation would prevent governments from imposing policies that would curtail the movement of money. For a country like El Salvador, which has been struggling with corruption, and Bekele’s administration which has been branded as Authoritarian the potential effect would be more transparency in the use of public funds and more power to opposing parties and protestors whose financial assets the government will find harder to freeze.
Nonetheless, this hastily passed law has drawn large amounts of criticism globally, especially from the US, the IMF, and the World Bank. The IMF even issued a blog post titled “Cryptoassets as a National Currency? A Step Too Far” deriding the adoption of bitcoin by a sovereign country. Two of the major criticisms are addressed below.
Article 7 – Article 7 of the bitcoin law enforces a forced tender mandate which requires merchants to accept bitcoin as payment with the only exception being for those merchants who don’t have the technology to do so. The implementation of this provision poses a logical gap as no state in the world is currently capable of enforcing such a transition on its citizens with millions of transactions happening each day. Also, aggressively enforcing this mandate on the population of El Salvador, 30% of which does not own smartphones would not bode well for the Bukele administration. Article 8 does provide relief to this mandate by mentioning that the government will provide “alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from bitcoin to USD if they wish.” None of the potential dividends that can be availed through the adoption of bitcoin mentioned previously require the acceptance of bitcoin by local, small-scale, and informal merchants. I believe it would be better for the country to let the bitcoin law thrive on its own advantages and pull back this section of the law.
Climate sustainability – A significant criticism of the increased use of bitcoin comes from environmentalists and climate conservatives. The computing power that is used to secure the bitcoin network excessively increases the amount of carbon dioxide present in the atmosphere. El Salvador aims to become a center for zero-carbon bitcoin mining. On Twitter, President Bukele offered to put up facilities for bitcoin mining “with very cheap, 100% clean, 100% renewable energy from our volcanoes.” El Salvador has an abundant supply of carbon-free geothermal energy from their volcanoes, which they use to generate at least one-quarter of their electricity. It is also already the largest geothermal energy producer in Central America. The country could potentially power its bitcoin network using volcanic heat that is independent of the use of fossil fuels. An important consideration for bitcoin miners is that energy cost is their biggest expense, and a morally questionable one because of its impact on the environment. Using clean geothermal energy would allow these miners to generate a significant chunk of revenue for El Salvador, enticing bitcoin entrepreneurs to move base to the country, bringing in much-needed foreign investment. Consequentially, if a gradual conversion to bitcoin mining through geothermal energy is implemented, the cost of electrifying rural areas would be considerably lowered through economies of scale.
President Bukele maintains that El Salvador is not de-dollarizing itself. The law aims to allow bitcoin to serve as a parallel monetary network on par with the dollar. Being reliant on the US dollar, unable to print its own money, and benefit from the US Federal Reserve’s agenda hinders the emerging economy of El Salvador. The dollar-dependent system lacks the tools for El Salvador to influence its economy by adjusting the money supply or the exchange rate. The successful implantation of the bitcoin law in El Salvador could be used as the blueprint for other dollar-dependent countries to reduce the American Federal Reserve Bank’s influence on their economies. I believe that it could potentially create a non-aligned movement, providing a third way to dollarized countries to transact independently and store monetary value outside the confines of Washington. I remain optimistic but cautious regarding the bitcoin law in El Salvador. The law was hastily passed and brief. I believe the climate concerns regarding bitcoin mining could be sufficiently addressed using geothermal energy available in the region. Yet, the success of the law is still largely dependent on its implementation, and concerns surrounding Article 7 persist. A fruitful integration of the bitcoin law has many benefits for El Salvador such as increased foreign investment through attracting wealthy crypto entrepreneurs, cheaper electricity for rural areas through increased production of geothermic energy, and access to a digitalized monetary network that is liberated from political stipulations enforced by the US through the dollar.
Bibliography
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BIS. (2018, February). Committee on Payments and Market Infrastructures. Bank for International Settlements. https://www.bis.org/cpmi/publ/d173.pdf
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Wintermeyer, L. (2021, August 9). Could developing NATIONS follow El SALVADOR'S move to bitcoin? Forbes. https://www.forbes.com/sites/lawrencewintermeyer/2021/08/05/could-developing-nations-follow-el-salvadors-move-to-bitcoin/?sh=d33e7f128b70.
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