The Good, Bad and Ugly of El Salvador’s Bitcoin Law
The president of El Salvador, Nayib Bukele, is young and popular and leveraged his forward-thinking image to introduce the bill. He announced his plan during a 2021 Bitcoin conference, and just days later introduced the new law to the Salvadoran legislature.
The move was seen as radical by many other nations, especially those pushing back on cryptocurrency.
Will El Salvador’s move unlock financial freedom for the unbanked population, as Bukele promises? Or will it result in a rise in money laundering in the world of organized crime that the nation has struggled with for generations?
About the Bitcoin Law of El Salvador
The so-called Bitcoin Law passed the Salvadoran legislature with a supermajority late on June 8, 2021. A total of 62 of 84 votes were in favor.
The bill, which comes into force in September, empowers Salvadorans to make payments (even pay their taxes) in Bitcoin. It also removes the obligation to pay taxes on capital gains, knocking down a common barrier of Bitcoin adoption.
It’s the opinion of Bukele and of those legislators who voted in favor that the new law will give the nation a means to reduce its dependency on the U.S. dollar, also.
Those against it, however, look at some of the law’s wording and wonder whether the bill truly leverages what Bitcoin enthusiasts espouse. For example, one article pf the bill mandates the acceptance of Bitcoin payments, which is not typical of any legal tender legislation.
Will the Salvadoran example serve as a catalyst for other nations? Or will it serve as a cautionary tale?
Let’s examine these questions together.
The Background of Bitcoin in El Salvador
A small, Salvadoran coastal resort town called El Zonte is where the Bitcoin conversation got started. Today, the plot of coast is affectionately referred to as “Bitcoin Beach.” There, a project began to provide cryptocurrency education and gain access to the largely unbanked population there.
The effort was initially sponsored by the Bitcoin-powered payment service Strike, but the Salvadoran government quickly became interested.
Within a few months, the CEO of Strike was sharing data and ideas with the president of El Salvador, looking at Bitcoin as a means to financially empower the Salvadoran population.
The question was, would it fit into the current landscape of the Salvadoran economy?
The Salvadoran Economy
Considering the economic circumstances of the small Central American nation, the Bitcoin Law is not as surprising to locals as it has been for the rest of the world.
El Salvador all but abandoned its own currency (the colón) in 2001. The U.S. dollar was adopted instead for greater economic stability and to attract foreign investment. While this worked for El Salvador much like it’s for other Latin American nations, it also introduced a new dependency on the U.S.
From the start, Salvadoran officials knew that El Salvador could not rely long-term on a currency whose policy it cannot affect (the United States government controls the policy of the dollar through the Fed).
This dependency stirred a growing interest in a currency whose supply would not be controlled by any central bank, which is where Bitcoin came in.
The additional economic component the Salvadoran government had to consider was that of remittances. A colossal 22% of the country’s GDP relies on remittances alone, meaning a payment system and currency with lower fees would have a significant impact on the country and on individual consumers.
Bitcoin was the clear answer.
El Salvador’s Political Scene
El Salvador’s economic context was not the only incentive pushing the Bitcoin Law. The country’s recent political history also compelled legislators to look at Bitcoin favorably.
El Salvador has been “run” by a long-standing and often corrupt elite for generations, like many other countries in Central and South America. The presidential elections every five years, however, gave people little hope with the same ultra-right and ultra-left options on the ballot.
In 2019, Nayib Bukele finally offered a new look at the country’s political possibilities. He campaigned on the back of the people’s dissatisfaction with the status quo. His anti-corruption message struck a nerve, too, firing up a base that was ready for a change.
This election cycle led to a more open frame of mind, allowing the Bitcoin Law to come under quick consideration.
Potential Benefits of Bitcoin Legal Tender in El Salvador
Supporters of the Bitcoin Law believe the legislation will impact the economy positively as well as the people.
Principal benefits proponents expect include:
- Attracting foreign investment
- Modernizing El Salvador’s financial infrastructure
- Reaching the underbanked and the unbanked
- Eliminating dependency on the dollar
- Promoting and developing the country’s renewable energy sector
Energy in El Salvador to Power Bitcoin Mining
El Salvador has another asset which will be sure to develop with its Bitcoin-focused legislation: renewable energy.
Along El Salvador’s western coast are 20 volcanoes that are potentially active. These have remained untapped as a potential energy source despite their rich geothermal energy reserves.
President Bukele has already revealed plans to harness this and other renewable energy sources the country has. This has attracted a new industry: Bitcoin miners.
Sergii Gerasymovych, EZ Blockchain’s own co-founder and CEO, weighed in on the significance of El Salvador’s support of the Bitcoin mining industry:
“Volcano mining is not a new concept. Iceland has been one of the largest crypto mining countries on geothermal energy. El Salvador will follow the model. The beauty about El Salvador is that it is not so far from the United States—it is only a three-hour flight from Miami. There will be a decent number of investors interested to invest in power generation in El Salvador.”
Gerasymovych also described EZ Blockchain’s own spread of Bitcoin mining containers and how an expansion to El Salvador would be a net positive for Bitcoin. The new mining sites would decentralize the network even more, and the use of geothermal energy would reduce the growing environmental concerns around Bitcoin energy consumption.
Weighing the benefits as well as the criticisms, El Salvador’s Bitcoin Bill passed the recent government vote with some clear priorities in mind. Plans are already underway for the implementation of the bill in September.
Only time will tell how well Bitcoin works to benefit Salvadorans and their government. The law does already appear to have opened doors for other nations to consider the same, however. Multiple other Latin American politicians are considering similar moves.
The wait-and-see approach doesn’t work for everyone, however. Given the abundance of renewable energy opportunities across the Americas, mining Bitcoin there has become increasingly attractive for miners as well as Latin governments. The move to Latin markets has already started because miners have to move fast to be competitive.
In a recent interview, Gerasymovych added:
“Central and South America have a lot of access to hydropower. Many counties will follow the model of El Salvador and open the doors for miners, especially after the exodus from China.”
Ultimately, each government, Bitcoin miner, and even individual consumer will have to decide what part they will play in the changing landscape of global currency. Bukele’s bold step has given Bitcoin supporters an opportunity to test their theses once and for all.