El Salvador's new bitcoin law? What does it mean and its impact?
President of El Salvador Nayib Bukele’s proposal before Congress was approved, making it the first country in the world to adopt bitcoin as legal tender.
Despite the possible impact on the nationwide adoption of bitcoin as a mainstream currency, 62 out of 84 lawmakers voted in favor to create a law to adopt bitcoin.
As El Salvador does not have its own currency, bitcoin will help expat Salvadorans by easing the process of sending remittances back home. President Bukele said that the US dollars will remain in circulation as legal tender.
"It will bring financial inclusion, investment, tourism, innovation and economic development for our country," President Bukele said in a tweet shortly before the vote in Congress.
Advantages of bitcoin adoption:
Remittances: Bitcoin offers a faster and cheaper way to send money across borders. Remittances in El Salvador account for roughly 20% of the nation’s GDP. Salvadorans can save on the transfer fees using bitcoin without relying on banks and remittance companies.
Protection from payment fraud: The major benefit of using bitcoin is that it helps to protect transactions from fraud and digital scams. Blockchain is more secure than ordinary electronic transactions, as it uses pseudonyms for privacy to shield the identity of the user. All the transactions and identities are strictly secured in the blockchain network.
Lower transaction fees: Bitcoin transaction fees are cheaper compared to other financial transactions. Financial institutions charge hefty fees. This is one of the many reasons cryptocurrency is better than the traditional banking system. The transactions in crypto cut off the intermediaries, which mean no additional fees, secure transactions.
The entire system is decentralized with no central authority in place. The people control digital currencies and the decentralization keeps them free from monopoly. So, no central authority or regulators can control the value and flow of the currency.
Volatility can either be a boon or a bane for the investors. The crypto market is highly volatile, prices change widely in a short period, and end up in great losses. In the past, bitcoin prices have surged and then dropped sharply, making it a risky investment. Such swings are rare among fiat currencies like US dollars, euros and so on. While bitcoin's volatility sometimes offers short-term benefits, it's unsuitable for more conservative investors with long time horizons.
As cryptocurrency transactions are highly secure and decentralized, it is hard for regulators to track down fraudulent activities. Illicit activities often use BTC as a mode of transactions and it is used to convert money earned from illegal sources through a clean intermediary to hide the source.
The cryptocurrencies are virtually untraceable, impenetrable, and authentication protocols have made it safer from hacking. However, if the private key to the wallet is lost, the wallet cannot be accessed, it will remain locked without the private key. This will eventually result in a financial loss, as the cryptos cannot be retrieved out of it. These are considered “dead wallets.”
A study conducted between Aug 13 and Aug 20 on the bitcoin law by The University Institute of Public Opinion (Iudop) in El Salvador reported on the disagreement by El Salvadorans on the government’s decision to adopt bitcoin as a legal tender.
Bitcoin will be a legal tender in just a few days. However, out of 1,281 people surveyed, at least 67.9% of them strongly disagree with the new bitcoin law, the rest 32% are in favor of it. “Only 4.8% define it correctly as a cryptocurrency,” the study details, adding:
“Approximately 7 out of 10 Salvadorans believe that the deputies of the Legislative Assembly must repeal the Bitcoin Law”.
CBW - External Analyst