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El Salvador becomes first country to adopt Bitcoin as legal tender

The El Salvador parliament on Wednesday approved the Bitcoin Law making the Central American nation the first to formally adopt bitcoin as legal tender. Bitcoin now joins the US dollar (USD), which has been the legal currency of the country since 2001. The new law will go into effect within 90 days.

“Despite El Salvador’s small size, Bukele’s effort is a major milestone in monetary policy history, one with significant ramifications for the global financial system.” — Avik Roy, Forbes

Meanwhile, India’s proposed regulations around cryptocurrency still remain unclear. Initially, the government said that it would ban cryptocurrency activity in India and then it clarified that it would adopt a  “calibrated approach.” Thereafter, the government amended the regulations on company financial disclosures recognising virtual currencies as digital asset. It also indirectly recognised the role of crypto exchanges as businesses that perform a fiduciary role. The government also told Parliament that crypto-exchange transactions and investments are taxable. Now, it is reportedly forming a new committee to examine the prospect of regulating the crypto-verse.

Why has El Salvador made bitcoin a legal tender?

Earlier in the day, President Nayib Bukele sent the bitcoin bill to the country’s Congress for a vote. The succinct 3-page bill states the following reasons why El Salvador is adopting the cryptocurrency:

  1. For the benefit of inhabitants: The bill states that it is the government’s “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. Increase financial inclusion: Stating that around 70% of the population does not have access to traditional financial services like a bank account, the government hopes to use bitcoin to facilitate financial inclusion for its citizens. “Financial inclusion is not only a moral imperative but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions,” Bukele said in last week Bitcoin 2021 conference held in Miami. Bitcoin will “generate jobs in the short term and provide financial inclusion to thousands outside the formal economy,” he added.
  3. Bitcoin answers exclusively to free-market criteria: The bill states that it is authorizing the circulation of bitcoin because its “value answers exclusively to free-market criteria” and this will help the government promote the economic growth of the nation.
  4. Ease remittances: Remittances from Salvadorans working abroad totalled $5.9 billion in 2020 and represented nearly 22% of the country’s GDP. In the Bitcoin 2020 conference, Bukele said that bitcoin “represents the fastest growing way to transfer those billions of dollars in remittances and prevent millions from being lost to intermediaries.”

Rules that regulate the use of bitcoin

  1. Unrestricted legal tender: The law states that bitcoin will be an “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.”
  2. Rate determined by the free market: The exchange rate between bitcoin and USD will be freely established by the free market.
  3. Prices may be expressed in bitcoin: Prices of all products and services provided in the country may henceforth be expressed in bitcoin.
  4. Taxes payable with bitcoin: Citizens can pay taxes to the state using bitcoin
  5. Not subject to capital gains tax: As with any legal tender, exchanges in bitcoin will not be subject to capital gains tax. Currently, in countries like the US, bitcoin is considered as property and taxed as such.
  6. USD will be reference price for accounting purposes
  7. Mandatory to accept bitcoin as payment: The law states that “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service” except those who, “do not have access to the technologies that allow them to carry out transactions in bitcoin.”
  8. Conversion to USD will be made available: Aimed at those who do not want to assume the volatility risks of bitcoin, the government said that it will provide alternatives that allow those wishing to convert payments received in bitcoin to USD automatically and instantly. To facilitate this, the government will create a trust at the Development Bank of El Salvador (BANDESAL), which will guarantee the convertibility of bitcoin to USD. “If there’s an ice cream parlour, he doesn’t really want to take the risk, he has to accept bitcoin because it’s a mandated currency but he doesn’t want to take the risk of convertibility, so he wants dollars deposited in his banking account, when he sells the ice cream, he can ask the government to exchange his bitcoin to dollars,” Bukele said in a Twitter Spaces conversation.
  9. Prior obligations can be paid with bitcoin: The law states that all prior obligations in money expressed in USD may be paid in bitcoin.

Steps the government will take increase bitcoin adoption

Promote necessary training: The bill requires the government to promote the necessary training to increase the population’s access to bitcoin transactions.

Support for those who start bitcoin-related ventures: A separate press release from the president’s office states that the introduction of the Bitcoin cryptocurrency will provide investment incentives and invite new technologies that will give the country an additional boost in its economic activity. To facilitate this, the government will provide 1) permanent residence for those who start Bitcoin-related ventures, 2) tax incentives and 3) an attractive business climate.

Provide better internet coverage: The press release also states that the government will take steps to install satellite technology to bring the Internet to places where current providers have a poor signal, thereby enabling more people to do bitcoin transactions.

Partnership with Strike: During the Bitcoin 2021 conference held last week, Bukele announced El Salvador’s partnership with digital wallet company, Strike, to build the country’s modern financial infrastructure using bitcoin technology.

May promote bitcoin mining: In a Twitter Spaces conversation held early Wednesday Bukele said that government might also promote bitcoin mining.

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