Three days. That was the time for El Salvador, the smallest country in Central America, made headlines in the world's tabloids. In just 72 hours, the country's President, Nayib Bukele, moved — with the help of Congress, of course — to pass the “Bitcoin Law” and make El Salvador the first country to adopt bitcoin as legal tender.

Although the measure is part of Bukele's disruptive management, which sees the approval as a major technological advance for El Salvador, several issues are debated around this “legalization” of bitcoin.

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This is because the country has never been a reference in the universe of cryptoactives, which is strange about the speed of approval. The European Union, for example, took years to switch to the euro and not even major nations made the decision to adopt bitcoin as their local currency.

Not to mention that El Salvador might not have been ready for change. About 70% of the population is outside the banking system and it is hard to imagine how people who are not even used to the traditional financial system will adapt so quickly to today's disruptive technologies.

The fact is that before agreeing or not with the decision taken, it is necessary to better understand all the points that led El Salvador to become a bitcoin reference.

What is this “Bitcoin Law”?

Passed by the Congress of El Salvador with 62 votes (out of a possible 84), the Bitcoin Law, with just 16 articles, basically establishes bitcoin as a legal currency in the country.

According to an excerpt from article 1 of the approved rule, "this law has as its object the regulation of bitcoin as legal tender, unrestricted with liberating power, unlimited in any transaction".

Thus, in addition to the US dollar — which extinguished the Salvadoran colon — the most traded cryptocurrency in the world will be another currency operating in the Central American country.

Bitcoin illustration with El Salvador flag next to dollar banknotes.
Operations in El Salvador can be done in dollar or bitcoin. Photo: Sphere/Shutterstock

Is the measure already in effect?

Not yet. The Bitcoin Law will enter into force just three months after its publication in the Official Gazette of El Salvador.

Only after this period can bitcoin be used in any transaction by individuals or legal entities.

Will the population of El Salvador be able to use bitcoin for “everything”?

According to the law, "any economic agent must accept bitcoin as a form of payment", except for those who "by a well-known fact and evidently do not have access to technologies that allow them to execute transactions in bitcoin".

In other words, all cash obligations that could be paid in dollars will also accept bitcoins, from simpler tasks, such as purchases of the month at the market, to tax payments.

The exchange rate between bitcoin and dollar will be freely defined by the market.

Will bitcoin replace the dollar?

According to the president of El Salvador, the idea is not to de-dollarize the country's economy. “We seek to allow the entry of entrepreneurs, talents and innovators in our country. I don't think having the dollar here is a problem. On the contrary, I think it will help the fact that both currencies are legal tender”, said Bukele last Tuesday (8).

However, some experts fear that the move is similar to what happened when the country introduced the US dollar into its economy.

“This was also done when the dollar was introduced, which was said to have prices in dollars and in Salvadoran colon (the now defunct national currency) coexist. And in the end, as we see today, the colon doesn't work," economist Cesar Villalona told BBC News World.

And the environmental impacts?

The environmental impacts of bitcoin mining are certainly one of the most discussed issues in the market. No wonder, the high consumption of energy and fossil fuels caused the Tesla, by billionaire Elon Musk, stopped accepting payments with the asset.

But Bukele's idea is to take advantage of the country's natural resources — which has about 170 volcanoes — to offer renewable energy at a reduced cost.

El Salvador Volcano
El Salvador's volcanoes are expected to provide 100% renewable energy to mine the cryptocurrency. Photo: Matyas Rehak/Shutterstock

“I have just guided the president of LaGeo (the state-owned company that controls the country's geothermal power plants) to create a plan to offer our structure for bitcoin mining with very cheap energy, 100% clean, 100% renewable, with no [carbon] emission from our volcanoes. This will evolve quickly!” Bukele posted on his Twitter.

The good news is that geothermals, responsible for 20% of the country's energy, have the potential to produce approximately 644 megawatts. But according to the government, only a third of that has been used.

This means that new investments in exploring this type of renewable energy must be made to optimize bitcoin mining in El Salvador.

Read more:

What is the motivation for the measure?

The first point is that 39-year-old President Nayib Bukele is indeed an enthusiast of new technologies. Possibly a more conservative management would not approve the measure or it would take much longer to debate the impacts of the Bitcoin Law.

The idea came from a project that has been underway for more than two years on El Zonte beach, in the south of the country. In the region, some companies already accept bitcoin as a form of payment, which motivated Bukele to take the project to the national level.

The president also believes that one of the main advantages of the initiative will be the reductions in intermediaries' commissions for remittances received from abroad — which would mean savings of up to 30% of the money sent. These remittances are extremely important to El Salvador's economy and account for about 16% of the local Gross Domestic Product (GDP).

Furthermore, as 70% of the population does not have a bank account and works in the informal economy, making bitcoin El Salvador's local currency could accelerate the financial inclusion of Salvadorans.

The measure is also expected to attract new investors. Bukele highlighted that the country is one of the few nations that does not have property taxes. There will also be no fees on earnings in bitcoin and El Salvador will offer permanent and immediate residence for those who decide to invest in cryptocurrency in the country's economy.

With more investments, economic development, greater job generation and, naturally, better living conditions for the population are expected.

And the risks?

The main uncertainty discussed by the market and by experts around the world is about the volatility of bitcoin. While the cryptocurrency broke records this year and surpassed the US$ 64 mark, the asset faced one of the worst months in its history in May, taking the price of the currency to around US$ 33.

This volatility could even be reflected in a person's purchasing power. And relying on a speculative market would not be the best of ideas.

Bitcoin volatility illustration
Bitcoin volatility raises concerns about the measure approved in the country. Photo: Sodel Vladyslav/Shutterstock

To mitigate this impasse, the government of El Salvador announced a $150 million fund in the country's Development Bank for Salvadorans to exchange the cryptocurrency for dollars whenever they want. In this way, Bukele claims that Salvadorans will not assume the risk of fluctuation — which, he says, will be assumed by the government.

Another point is that the adoption of bitcoin as a local currency can facilitate crimes such as money laundering, illegal embezzlement, corruption, among others. It's much easier to track money than cryptocurrencies, for example.

The issue of security is even discussed a lot. Even though it is premised on being a secure asset, hackers and cybercriminals are increasingly looking to cryptocurrencies.

Recently the US managed to recover about $2,3 million in digital coins stolen by hackers. But despite the recovery of assets, it created even greater fears about the security of cryptocurrencies. Also, the US has succeeded, but will El Salvador be able to do the same in case of possible theft?

Interestingly, El Salvador takes a step contrary to most countries. China recently banned cryptocurrency operations in its country. The United States itself tightened its regulation and Thailand announced restrictions on meme cryptocurrencies, such as dogecoin, and Tokens in your country.

If all these uncertainties were not enough, analysts believe that the bet on bitcoin could hinder conversations with the International Monetary Fund (IMF), since the country is negotiating economic aid of up to US$ 1,4 billion.

It will work?

That is the question that does not want to be silenced. There are those who reinforce all the uncertainties surrounding the measure taken by the government of El Salvador, while others may believe that the measure will boost technological and financial advances in the country.

But of course, this will not be an easy task. Remember that, to operate bitcoin, Salvadorans will need an electronic device with internet and, unfortunately, the situation is not the best.

Only 45% of the population has access to the internet and more than 90% of rural households have no internet connection, according to a 2020 study by the IDB, IICA and Microsoft.

To solve the problem, Bukele announced a satellite infrastructure to address the lack of connectivity in rural areas. The Bitcoin Law also guarantees that the necessary training and mechanisms for implementing the measure will be the responsibility of the State.

The truth is that, in just three days, El Salvador went from being a mere country in Central America to gain the global spotlight and become a reference in the world of criptomoedas.

Now, the whole world must carefully watch the development of the measure in the country in the coming months. The consequences could dictate future trends with cryptoactives.

Source: with the BBC/Examination

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