El Salvador’s Economic Solution: Bitcoin

On June 8, the government of El Salvador shocked the world with the sudden announcement that the country will begin accepting Bitcoin as legal tender. The announcement was made by President Nayib Bukele on the final day of the Bitcoin 2021 conference, held in Miami. The move towards accepting the decentralized currency is a major win for advocates of Bitcoin and its blockchain technology. The acceptance comes at the same time as China’s forced crackdown on users and miners within its borders.

El Salvador had previously been using the Colon until 2001, when they switched to the U.S. dollar.

Critics, including some Bitcoin advocates, have expressed concern regarding Article 7 of the new law. Translated by The Foundation for Research on Equal Opportunity, Article 7 states,

“Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”

To the critics, such as George Selgin, this amounts to a “forced tender” mandate that goes far beyond a mere legal tender law (which would declare a monetary medium an acceptance but not obligatory medium of exchange) and moves into the domain of coercion (1). The government would subsequently maintain a central digital wallet for merchants to exchange their Bitcoin into USD. The president, however, reassured citizens that the use of Bitcoin will be optional. “The use of Bitcoin will be optional, nobody will receive Bitcoin if they don’t want it…If someone receives a payment in Bitcoin they can choose to automatically receive it in dollars,” said Bukele. Salaries and pensions will continue to be paid in U.S. dollars. The law is set to become effective September 7, 2021.

President Bukele stated the primary focus of this law is to ease the burden and costs of remittances sent from abroad. El Salvador relies heavily on money sent back from workers abroad. World Bank data showed remittances to the country made up nearly $6 billion or around a fifth of gross domestic product (GDP) in 2019, one of the highest ratios in the world. Less than 1% of the volume of global cross-border remittances are currently in cryptocurrency, according to Kenneth Suchoski, U.S payments and fintech analyst at Autonomous Research. But in the future crypto is expected to account for a larger slice of the more than $500 billion in global annual remittances (2).

The president also announced that every citizen that downloads the Chivo e-wallet will receive $30 in Bitcoin. The $30 in Bitcoin will be sent to users’ wallets once they verify their identities via the app’s face recognition software (3).

However, many El Salvadorans are not in favor of this proposition. According to a survey by the Chamber of Commerce and Industry of El Salvador (Camarasal), “eight out of 10 Salvadorans would not agree to receive payments in Bitcoin” (4).

The full text of the new law, translated by The Foundation for Research on Equal Opportunity is provided below.

DECREE No.

THE LEGISLATIVE ASSEMBLY OF THE REPUBLIC OF EL SALVADOR

CONSIDERING:

1.       That in accordance with Article 102 of the Constitution of the Republic, the State is under the obligation to promote and protect private enterprise, generating the necessary conditions to increase national wealth for the benefit of the greatest number of inhabitants.

2.       That under Legislative Decree № 201, published in Official Gazette number 241, Volume 349, dated December 22, 2000, the United States dollar was adopted as legal tender.

3.       That approximately seventy percent of the population does not have access to traditional financial services.

4.       That it is the obligation of the state to facilitate the financial inclusion of its citizens in order to better guarantee their rights.

5.       That in order to promote the economic growth of the nation, it is necessary to authorize the circulation of a digital currency whose value answers exclusively to free-market criteria, in order to increase national wealth for the benefit of the greatest number of inhabitants.

6.       That according to the previous considerations, it is essential to issue the basic rules that will regulate the legal course of bitcoin.

THEREFORE,

DECREES the following:

BITCOIN LAW

CHAPTER I

GENERAL DISPOSITIONS

Art. 1. The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.

What is mentioned in the previous paragraph does not hinder the application of the Monetary Integration law.

Art. 2. The exchange rate between bitcoin and the United States dollar, subsequently USD, will be freely established by the market.

Art. 3. Prices may be expressed in bitcoin.

Art. 4. Tax contributions can be paid in bitcoin.

Art. 5. Exchanges in bitcoin will not be subject to capital gains tax, just like any legal tender.

Art. 6. For accounting purposes, the USD will be used as the reference currency.

Art. 7. Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.

Art. 8. Without prejudice to the actions of the private sector, the State shall 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. Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

Art. 9. The limitations and operations of the alternatives of automatic and instantaneous conversion from bitcoin to USD provided by the State will be specified in the Regulations issued for this purpose.

Art. 10. The Executive Branch will create the necessary institutional structure to apply this law.

FINAL AND TRANSITIONAL PROVISIONS

Art. 11. The Central Reserve Bank and the Superintendency of the Financial System shall issue the corresponding regulations within the period mentioned in Article 16 of this law.

Art. 12. Those who, by evident and notorious fact, do not have access to the technologies that allow them to carry out transactions in bitcoin are excluded from the obligation expressed in Art. 7 of this law. The State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

Art. 13. All obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin.

Art. 14. Before the entry into force of this law, the State will guarantee, through the creation of a trust at the Banco de Desarrollo de El Salvador (BANDESAL), the automatic and instantaneous convertibility of bitcoin to USD necessary for the alternatives provided by the State mentioned in Art. 8.

Art. 15. This law will have a special character in its application concerning other laws that regulate the matter, repealing any provision that contradicts it.

Art. 16. This decree will take affect ninety days after its publication in the Official Gazette.

1)       Coindesk, June 18, 2021

2)       Reuters, June 24, 2021

3)       Coindesk, June 24, 2021

4)       El Mundo, June 21, 2021