Ask CryptoVantage: Why Did El Salvador Make Bitcoin Legal Tender?

The Bitcoin Law

Before El Salvador passed the Bitcoin Law on June 8th, 2021, they did not have their own national currency. The US Dollar was the only legal tender in the country. Shortly after the bill was passed, the President of El Salvador shared the English translation of the bill on Twitter.

The Bitcoin Law outlines that in El Salvador, goods and services can be priced in either US Dollars or bitcoin. Taxes can also be paid using either currency. This means that businesses and individuals can operate using bitcoin as their only currency without ever needing to use US Dollars.

Another benefit of the Bitcoin Law is that transactions using bitcoin will not be subject to capital gains taxes. This is especially important for encouraging people to use bitcoin as a currency. In other countries, capital gains taxes discourage people from using bitcoin as a currency because: a) they need to keep records of every transaction they perform using bitcoin, b) they need to calculate what their profits or losses were on each bitcoin transaction, and c) they must pay tax on any of the profits they made.

While bitcoin can now officially be used as a medium of exchange and a store of value, the US Dollar will still be the currency used as a unit of account in El Salvador. So, although a business or individual can operate solely using bitcoin, they will need to record their incomes and expenses in US Dollar terms for accounting purposes.

Anyone in El Salvador participating in a monetary transaction must accept bitcoin as payment as long as they have the technological means to do so, such as a smart phone. If the people or businesses accepting bitcoin as payment do not want to hold the bitcoin, the government will offer a service that automatically converts the bitcoin into US Dollars. This will be done with a $150M fund that the government has reserved for purchasing bitcoin from citizens who do not want to hold onto it.

What Does it Mean for Salvadorans?

Currently, 70% of the population in El Salvador does not have access to financial services. This has prevented many Salvadorans from participating in the global economy. Because of the digital, decentralized nature of bitcoin, it operates across borders with ease. Introducing bitcoin as a legal tender gives Salvadorans direct access to the global economy as long as they have a smartphone or computer.

Until the Bitcoin Law was passed, El Salvador used the US Dollar as their main currency. This meant that the country did not have any control over things that affect the currency’s value, like inflation. Introducing bitcoin as legal tender allows Salvadorans to have easy access to a currency that cannot be inflated, which can protect citizens in a situation where the US Dollar undergoes rapid inflation and begins to significantly lose value.

What Does it Mean for Bitcoin?

El Salvador’s adoption of bitcoin as legal tender may pave the way for other nations to follow suit. Many countries have been hesitant to introduce bitcoin as a legal tender because of the unanticipated complications that may come along with it. It will likely take some time for all the kinks to be ironed out, but El Salvador may take some of the complications and risk away for other nations to introduce similar laws. The use of bitcoin as legal tender in El Salvador will act as a stress test on bitcoin and the lightning network, helping evaluate whether the current technology can handle a higher volume of smaller transactions.

Nations like El Salvador adopting bitcoin as legal tender will increase the demand for bitcoin over time. While the news of El Salvador adopting bitcoin has not caused a significant price increase, it has caused other small countries around the world to start considering adopting bitcoin.

Politicians from Paraguay, Panama, Columbia, Brazil, Argentina, and Tonga have all shown strong support for adopting bitcoin as legal tender in their countries. It’s only a matter of time before more countries move towards using bitcoin as legal tender.