On Monday, El Salvador officially becomes the first country to legalize bitcoin as an official tender. President of El Salvador Nayib Bukele put forth the proposal on legalization of bitcoin, which was approved by the lawmakers with the majority voting in favor of the new bill.

Latin America's youngest, President Bukele who is known to break norms had earlier tweeted that the new law "will bring financial inclusion, investment, tourism, innovation, and economic development for our country."

This new law will help El Salvador to attract foreign investment, tourism to this Latin American nation which was earlier relying on US dollars for all financial transactions. The citizens of the Latin nation can now do daily financial transactions in bitcoins from buying property to paying taxes.

“This will generate jobs and help provide financial inclusion to thousands of citizens outside the formal economy, and in the medium and long term we hope that this decision can help us push humanity a tiny bit into the right direction,” President Bukele said.

He also mentioned that a new law will be enacted to give permanent residency to any individual who invests three bitcoins in El Salvador's economy.

This move has shaken up the cryptocurrency market with bitcoin jumping above $37000 in a matter of hours after the law was passed. El Salvador's adoption of bitcoin has certainly delighted many cryptocurrency fans around the world. The country has now partnered with Strike, a digital wallet company, to build modern financial infrastructure using bitcoin technology.

This move by the El Salvador lawmakers comes as a relief, as 70% of its citizens lack access to a basic bank account. Without a bank account, it’s risky to hold cash, however, a bitcoin wallet solves this problem; from protecting savings using a password or PIN to accumulation of wealth over time.

Nigel Green, CEO, and founder of deVere Group predicts that more countries will soon join El Salvador in adopting Bitcoin as an official legal tender.

"Larger, more powerful countries are trying to quash or slow the inevitable shift to borderless, global, digital currencies." He further adds, "this small Central American nation has embraced the biggest one of them all -- bitcoin."

Nigel Green said the adoption of bitcoin by countries like El Salvador made sense as the country is entirely dependent on the US dollar, and this alternative currency doesn't come with the US dollar’s political constraints.

Why the bill is passed?

Remittance sent from the foreign country by the Salvadorans working abroad contributes to 20% of the total country's GDP. The money transfers services like western union and others are highly regulated and centralized, hence sending funds can be complicated.

Accepting bitcoin as a legal tender makes it easier for anyone with a mobile phone to transfer funds to avoid paying high transaction fees and waiting for a longer transfer time. The cryptocurrency is stored in a digital wallet app, which allows multiple ways to convert cryptocurrency to cash.

Is this a good idea?

Countries like El Salvador which rely on foreign remittance to contribute their GDP--bitcoin and other Cryptocurrencies are well suited as an alternative currency, which charges little or no cost of money transfer. Also, In El Salvador, more than 50% of its population don't have access to bank account. This service works without opening a bank account. People open bank account because of interest they will receive on saving but today there are many companies which offer to give interest on cryptocurrency.

What would be the outcome?

Bitcoin and other cryptocurrencies are known to be highly volatile. That’s why many critics in this field suggest against making cryptocurrencies as legal tender. If several bitcoin wallet holders decided to sell it, the price will fall fast. But this is not the case in traditional currency, where the central banking system controls the flow of currency as per the economy.

Another concern would be the total supply of bitcoin, which has been fixed at 21 million coins, of which 2.2 million remained to be mined. This will eventually decrease the prices. But analyst predicts an increase of price due to increase in demand if more countries allow the use of bitcoin.

But one thing is certain, this decision will benefit the majority of El Salvador's population with no access to the banking system and will boost financial inclusion in the country.

El Salvador developments in the bitcoin space will be watched closely to know how they will implement these new payments mechanism on a country-wide basis.

This decision might even change the perception of bitcoin and other virtual currencies on the global stage. Already, a handful of other Latin American leaders have indicated that they would follow suit in the adoption of cryptocurrencies.

Pavan A

CBW - External Analyst

INDIA