El Salvador officially adopted Bitcoin as legal tender this Tuesday, Sept. 7, and announced the purchase of 400 cryptocurrencies worth nearly $21 million as a reserve, New York Post reported.
Salvadorans will be able to pay for goods and services and even taxes with Bitcoin. Bitcoin transactions will be exempt from capital gains tax, and foreigners who invest three Bitcoins in the country (about $120,000) will obtain residency.
The government’s plan includes the installation of 200 ATMs that will be able to convert U.S. dollars—which is also legal tender in the Central American country—into Bitcoins, as well as an app to pay with the cryptocurrency that will have an initial credit of U.S.$30 and staffed kiosks to assist people.
According to The Guardian, El Salvador’s President Nayib Bukele said in announcing the measure:
“This will generate jobs and help provide financial inclusion to thousands outside the formal economy, and in the medium and long term we hope that this small decision can help us push humanity at least a tiny bit into the right direction.”
One of the apparent benefits the president highlighted is the remittance of money.
A quarter of the equivalent of El Salvador’s population lives in the United States and each year money sent from Salvadorans living in the United States to their relatives in El Salvador hovers around $6 billion.
With cryptocurrency, millions of the cost of sending money would be saved.
In addition, the president explained, more than 70 percent of Salvadorans do not have a bank account, nor traditional methods to send or receive money, now with bitcoin and its respective application, it will help this large segment of people.
Why Bukele decided to implement Bitcoin
According to a Forbes report, one of the main reasons behind the decision to adopt the cryptocurrency in the country’s economy that relies on the U.S. dollar is that recently the U.S. Federal Reserve, in an attempt to inject more money into the pandemic-stricken local economy, limited the circulation of dollars outside of the local economy, which severely impacted the Salvadoran economy.
“Central banks [like the U.S. Federal Reserve] are increasingly taking actions that may cause harm to the economic stability of El Salvador…in order to mitigate the negative impact of central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria,” Bukele stated when explaining his reasons.
What are the downsides of a Bitcoin economy?
Since it is a recent innovation, few people know how Bitcoin works, especially in a low educated and impoverished society, it is certainly a challenge for people to use cryptocurrency in their daily lives.
Until ATMs and kiosks staffed to assist people are fully functional, people are going to rely on some intermediary to be able to convert their cryptocurrencies to dollars and according to Salvadorans, this conversion costs 10 percent of the transaction value.
Another aspect is the irregularity of the value of Bitcoin.
According to the BBC, the value of Bitcoin has risen and fallen dramatically in the last year. It went from around $10,000 for a single coin in September 2020 to a high of $63,000 in April 2021 before dropping to $30,000 in July this year.
As a result, those who are aware of these fluctuations fear losing it all overnight.
As a digital currency circulating in cyberspace, there is a high risk of the money being hacked.
On August 11, CNBC reported that a platform where different users buy and sell cryptocurrencies was hacked and $600 million was stolen due to a breach in the site’s security.