When Did El Salvador Adopt Bitcoin as Legal Tender

The results show that 39% of respondents are against the idea of making Bitcoin legal. Of those, 28 percent said they were strongly opposed, while 11 percent said they were “somewhat” against the idea. The remaining 34% said they “didn`t know.” President Nayib Bukele says the legalization of Bitcoin will help many Salvadorans, about 70 percent of whom do not have a bank account, make the transition to the formal economy. In particular, he expects this measure to make it cheaper and faster for citizens to receive remittances from abroad. Remittances were an important source of income for his heavily indebted country. “I just walked into a McDonald`s in San Salvador to see if I could pay for my breakfast with Bitcoin, I was expecting to be told no,” Aaron van Wirdum said in a tweet retweeted by Bukele. 7. In September 2021, El Salvador became the first country to adopt Bitcoin as legal tender, after the law was quickly passed three months earlier. However, Salvadoran citizens, multilateral institutions and international capital markets did not welcome the news and fear that the costs of this monetary experiment will outweigh the potential benefits. If there are lessons to be learned from this monetary experience, El Salvador is a good example of how not to accept a cryptocurrency as legal tender. The use of digital currencies as legal tender can only be achieved through multilateral cooperation, rather than by one country trying to do it alone. A survey conducted by Francisco Gavidia University`s Centro de Estudios Ciudadanos in November 2021 found that 91% of Salvadorans prefer the US dollar to Bitcoin.

[35] In January 2022, Fortune reported that the move to Bitcoin made paying for remittances more difficult, not easier, as promised, because the fees associated with Bitcoin transactions were several times higher than traditional remittances. [36] Beyond the botched implementation, Bitcoin also presents challenges as a national currency. To conceptualize these challenges, compare dollarization to “bitcoinization.” On 1 January 2001, El Salvador adopted the U.S. dollar as its legal tender because of the close economic ties between the two countries: the United States is El Salvador`s main trading partner and the main source of foreign direct investment (FDI). In addition, nearly three million El Salvadorans have emigrated to the United States, and by 2021, remittances will reach $7.3 billion, or more than 25 percent of El Salvador`s GDP. The monetary reasons for adopting Bitcoin, on the other hand, are much less obvious. Before the current monetary experiment, Bitcoin was almost non-existent in economic transactions in El Salvador. While dollarization has eliminated currency risks and the U.S.

dollar is a relatively stable currency, Bitcoin is extremely volatile and carries currency risk. Dollarization has also eliminated the need for foreign exchange and its costs, as the U.S. dollar is an international reserve currency. Meanwhile, Bitcoin is still only marginally used in the global economy. The U.S. dollar is backed by the U.S. Treasury and the Federal Reserve, and thanks to dollarization, El Salvador has been backed by the strength of both institutions. Bitcoin, on the other hand, is distributed through a payment mechanism without a central authority supporting its value. Finally, the government argued that under the new policy, Salvadorans will not have to pay fees when sending remittances to their families, as the government`s Chivo wallet will not charge such fees; While this is true, all costs associated with operating and managing the system are borne by taxpayers` money, whether they use the service or not.

In 2001, El Salvador introduced the U.S. dollar as legal tender to ensure the monetary stability that the country`s national currency, the colón, had not achieved in the past. The reform has worked: the country`s annual inflation rate, which was well over 10% between 1977 and 1995, has fallen considerably since the introduction of the dollar. It has been below 2% since 2012 and close to zero since 2015 – a rarity in Latin America. In January 2022, the International Monetary Fund called on El Salvador to stop using Bitcoin as legal tender, posing a risk to the country`s financial stability, integrity, and consumer protection. [32] [33] The IMF pointed out that the continued use of Bitcoin would make it less likely that the institution would grant El Salvador a previously discussed $1.3 billion loan. [34] The World Bank and the International Monetary Fund (IMF) consider El Salvador`s adoption of Bitcoin as a potential prime target for money laundering and other illicit financial activities. In addition to Central America, the news could have implications for the United States, where some proponents are considering the idea of making Bitcoin legal.

A recent survey by the Universidad Centroamericana José Simeón Cañas, a Jesuit college based in El Salvador, found that 67.9% of people disagreed with the decision to legalize Bitcoin Bitcoin. Many respondents said they don`t know how to use cryptocurrency, according to the survey. The president announced his intention to make Bitcoin the legal tender of El Salvador at the Bitcoin 2021 conference in Miami. Interestingly, Bukele`s decision is seen as a country`s first experiment in using a volatile currency as legal tender. Remarkably, this program has attracted a lot of criticism, including the International Monetary Fund and leading economists. But Bitcoin is probably not the solution. Other ways to reduce these transaction costs look more promising. And holding or trading such an unstable asset is a bad idea for low-income people who can barely afford to endure price fluctuations of up to 30% in a single day. Bitcoin has quadrupled in the last year, which is part of the attraction. But what goes up, down too. El Salvador is the first country in the world to make Bitcoin cryptocurrency legal.

A year after the launch of Bitcoin, economic surveys revealed that cryptocurrency was not widely used in El Salvador, partly due to a lack of digital literacy. She claimed that this had led to a 30 percent increase in tourist frequency, with 1.4 million people visiting the country. Many financial experts are skeptical about El Salvador`s move to Bitcoin. They point out that cryptocurrencies like Bitcoin are highly volatile speculative assets with no physical support and therefore tend to rise and lose value alternately. “This risky exchange rate volatility should be avoided when El Salvador introduced the dollar,” warned Jaime Reusche of rating service Moody`s, which downgraded El Salvador in July in part because of the Bitcoin law. “This clearly has no precedent,” he added. The introduction of Bitcoin as a legal tender brought more uncertainty at a time when the country needed to build more trust and trust instead. Before the COVID-19 pandemic, El Salvador`s public debt was already the main vulnerability of the economy.

The problem was exacerbated by the pandemic in 2020 – public debt reached 89.9% of GDP, mainly with short-term domestic debt and foreign bonds. The government`s negotiations with the International Monetary Fund on an Extended Fund Facility (EFF) gave hope that fiscal policy would improve, resulting in a four-point decline in the JP Morgan Emerging Markets Bond Index (EMBI) between October 2020 and April 2021. However, due to the coup before the Constitutional Court on May 1, 2021, the Bitcoin law, and tensions with the US government, the EMBI for El Salvador jumped more than ten in September 2021 (see chart below), suggesting a lack of confidence in the country`s sovereign debt. 5. In June, the President of El Salvador announced in a pre-recorded video at the BITCOIN 2021 conference in Miami that El Salvador would be the first country to adopt Bitcoin as legal tender. The announcement was made without the prior knowledge of Salvadorans. On June 8, the Economy Ministry submitted a draft law to the National Assembly, which approved it and published it in one day – an easy task, since the party of executive power has a supermajority in the legislature. Bitcoin became legal tender on September 7, 2021.

Bukele kept its word and made El Salvador the first nation to adopt Bitcoin as its legal tender on September 7, 2021. “If you don`t understand Bitcoin, it means you`re old. I am 78 years old. I`m old. I don`t understand. I would be very careful with btc. It doesn`t make much sense, and if you`re nervous about the world, gold would be a better place to store value. On the other hand, the majority of those who opposed the idea of making Bitcoin legal were over 35 years old.