Cryptocurrency South America Spotlight

Bitcoin Announced As Legal Tender in El Salvador

On the 9th of June 2021, El Salvador announced that congress had voted in favour of president Nayib Bukele’s proposal to use Bitcoin as legal tender. Having previously used the US dollar as its national currency, 62 out of 84 votes were cast supporting the introduction of cryptocurrency as a viable tender too. Its use will begin 90 days after the announcement was made, with the Bitcoin-dollar exchange rate set by the market.

Under the law, bitcoin must be accepted by firms when offered as payment for goods and services. Tax contributions can also be paid in the cryptocurrency.

“If you go to a McDonald’s or whatever, they cannot say we’re not going to take your bitcoin, they have to take it by law because it’s a legal tender,” Bukele said in an online conversation he held with cryptocurrency industry figures in parallel to the debate in Congress.

World Bank data showed remittances to the country made up nearly $6billion or around a fifth of GDP in 2019, one of the highest ratios in the world. El Salvador’s president went on to point out that over 70% of the population lacked access to traditional finance. As El Salvador economy relies on workers abroad sending money back, cryptocurrency, theoretically, offers a quick and cheap way to send money across borders, without relying on remittance firms typically used for these transactions.

The initial reaction from people across the world varied: cryptocurrency supporters hailed the move as legitimising the emerging asset, whilst others have criticised the move as complicating a currency – the need to understand one’s currency was made abundantly clear and many El Salvadorians argued Bitcoin was completely unknown to them. With financial inclusion being a critical issue in all countries and especially in the developing world, many countries in South American, as well as in Asia, are closely watching El Salvador’s move.

Many larger economies have been cautious to adopt DeFi. Leon Gauhman, CSO at digital product consultancy Elsewhen has argued that this was a step in the wrong direction.

“While arguably something of a PR stunt, El Salvador making Bitcoin a legal tender is potentially an interesting template for global adoption of cryptocurrencies and DeFi.  Smaller economies such as El Salvador’s with little to lose and a lot to gain from the enormous latent value of the crypto economy, are arguably well placed to lead the legitimisation of DeFi and crypto. While the top economies are debating the risks and benefits associated with crypto and DeFi adoption, developing countries in the Americas and Africa are likely to move forward to integrate crypto and DeFi into their economies.

“The more countries that join this crypto-pioneering group, the harder it will be for the bigger, more crypto-cautious economies to continue dragging their feet.  Whatever the rights or wrongs of El Salvador’s move, the G7 and other big world economies are setting themselves up for a massive missed opportunity. Instead of leading in setting the standards and trends around Defi and the crypto economy, they risk merely responding to risks set by much smaller players. “

BKCoin Capital is a digital assets hedge fund based in Miami – its founding principals had this to say on El Salvador’s announcement. Carlos Betancourt said, “El Salvador adopting bitcoin as legal tender will have incredible implications. Other LatAm countries are already gearing up to push similar legislation.”

“In Paraguay, Congressman Carlos Rejala will be drafting a bill and submitting it for approval by next month to attract crypto businesses to Paraguay. The bill will position Paraguay as a crypto hub in LatAm focusing primarily on their advantageous cost of electricity. Paraguay can offer crypto miners average costs of $0.05/kilowatt-hour – some of the lowest rates in the region while mainly using hydroelectric sources.

“Additionally, Mr Rejala, tweeted/tagged PayPal, which indicates their move may involve payments and remittances – a key move for any LatAm country as the vast majority of Latin Americans use existing, and very expensive, payment rails to support their families from countries like the USA.

“In Panama, Congressman Gabriel Silva has already started tweeting about bringing crypto into the country. He doesn’t want Panama to be left behind in terms of innovation and will be submitting a bill focusing primarily on Panama becoming an ‘entrepreneurship hub’ for all blockchain technologies.

“Argentina and Brazil are two countries to track in the coming weeks. Both countries have politicians publicly supporting cryptocurrencies. In Argentina, electricity/power is subsidised by the government, making it very attractive for regular individuals to mine bitcoin at very affordable pricing – something that Venezuelan’s have been doing for years. The caveat will be the government shutting down small miners and eventually taxing them heavily like they did to commodity traders during Cristina Fernandez de Kirchner’s first presidency. As for Brazil, expect a crypto push by the Federal Deputy of Brazil, Gilson Marques, in the area of tax and payments.”

He concluded by saying “The most powerful thing about this news is that if any other country legalises bitcoin as legal tender and starts transacting with El Salvador all banking rails will be expected to adopt cryptocurrencies and will no longer be able to not recognise it or shut it down all together because it is deemed a real and legal asset/form of payment.”

Kevin Kang, BKCoin Capital’s other founding principal said “Even though El Salvador is a relatively small country, Bitcoin will potentially add 10 million new users and add $6billion dollars a year in remittances.

“Despite its nominal GDP of only $25 billion, it has bigger global implications. As Bitcoin becomes legal tender in one country, with more to follow in LatAm, Bitcoin will have to be recognised as money under the US commercial law.”

“Banks have to treat it like any other foreign currency, meaning corporate treasurers could potentially buy Bitcoin without facing much backlash because it’s no different than holding Euros or JPY on their balance sheet. Banking regulators around the world will also have to recognise Bitcoin as a currency.

“El Salvador adopted the USD in 2001 and most of their exports are commodities. With 25% of all M2 money supply having been created this past year alone, it’s inevitable the dollar is going to devalue. If you’re President Bukele, what’s the benefit of El Salvador to stay on the USD with ever growing US liabilities and an aging demographic to pay for? The emerging markets are not getting the economic benefits of holding the USD anymore.

“For the first time in history, there is an alternative to piggybacking off of a large nation state. If we see other LatAm countries following El Salvador’s move, it could be one of the most pivotal points in history. Emerging countries have nothing to lose as they’ve already been crushed by inflation and destroyed their own middle classes.”

Following these initial reactions, the World Bank has responded to El Salvador’s announcement and request for help with implementing the cryptocurrency as legal tender.

“We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes,” a World Bank spokesperson told the Reuters news agency via email. “While the government did approach us for assistance on Bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.”

This is in part due to its ability to avoid tax. Daniel Simon, Senior Partner and Tax and Estate Planning specialist at Collyer Bristow voices how Bitcoin could escape taxation. “Now HMRC have decided, for want of a better idea, that it is like a share not a currency and that it is located where the owner is tax resident.  Largely it will be taxed to capital gains tax unless you are trading in Bitcoin in which case you will pay income tax.  If Bitcoin or other cryptocurrencies become recognised as currencies, then you could buy and sell them without tax on the profit of currency speculation.”

Author

  • Francis is a junior journalist with a BA in Classical Civilization, he has a specialist interest in North and South America.

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