Bitcoin: A legal tender

This Wednesday marked a big day in the bitcoin revolution. Or, in this case, revolución. El Salvador, a country in Central America passed a Bill to make Bitcoin a Legal Tender. Let’s break down this Bitcoin Bill and understand what it entails.

Hello and welcome back I am your Host Kushagra and this is Satoshi Saturdays

Early on Wednesday, almost three-quarters of El Salvador’s lawmakers voted to pass the much-heralded Bitcoin Law.

It follows President Nayib Bukele’s appearance at last weekend’s bitcoin conference in Miami, during which he promised to make the king crypto legal tender.

Well let’s take it up from the basics:

What is a Legal Tender?

A legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered in payment of a debt extinguishes the debt.

Well, here is the reasoning for why the country has decided to adopt it as a means of payment:

1. That in accordance with Article 102 of the Constitution of the Republic, the State is under the obligation to promote and protect the private enterprises, generating the necessary conditions to increase national wealth for the benefit of the greatest number of inhabitants
2. That under Legislative Decree № 201, published in Official Gazette number 241, Volume 349, dated December 22, 2000, the United States dollar was adopted as legal tender.
3. That approximately seventy percent of the population does not have access to traditional financial services.
4. That it is the obligation of the State to facilitate the financial inclusion of its citizens in order to better guarantee their rights.
5. To promote the economic growth of the nation, it is necessary to authorize the circulation of a digital currency whose value answers exclusively to free-market criteria to increase national wealth for the benefit of the greatest number of Inhabitants.
6. That according to the previous considerations, it is essential to issue the basic rules that will regulate the legal course of bitcoin.

You might also be asking yourself whether access to financial services couldn’t be improved by trying a less risky fintech idea, let’s say, mobile payments (using real money). Well, I have no reply to that.

Alright, but how will this work?

I read the draft of the bill and I can summarize this that

1. Goods May be priced in Bitcoin.
2. Taxes contributions may be paid in bitcoin
3. Bitcoin transactions will not face a capital gains tax
4. The U.S. dollar will remain the reference currency for the bitcoin price
5. Bitcoin must be accepted as a form of payment by “every economic agent”
6. The government will “provide alternatives” to enable crypto transactions. That means, the government will provide automatic and instantaneous convertibility of Bitcoin to USD

Who would actually want to pay in bitcoin rather than dollars, I hear you ask? Well, usually converting real money into bitcoin carries a hefty fee. And also what happens with returns? Do you get refunded at the original exchange rate or the one that happens to coincide with your return? Isn’t there a huge risk for both merchants and buyers when using such a volatile instrument? The bill, unfortunately, doesn’t talk about it.

But despite the obvious flaws, there might be a grander plan.

Now there are 2 theories as to why El Salvador may want bitcoin.

First

The President of El Salvador’s decision to adopt BTC as an alternative to the USD for transactions in his country may actually be quite sensible. The problem for “dollarized” countries is that they must dance to the monetary and fiscal tune of whichever country issues the currency they use because they do not have their own currency. Monetary and FISCAL because of the overriding need to maintain a positive BOP.

But breaking the dollar dependence by issuing their own currency is not easy. Dollarized countries usually have a history of political and economic instability. Getting the world, or even their own people, to accept a currency issued by the government is hugely problematic.

So adopting BTC potentially gives El Salvador the hard-currency peg and monetary discipline it needs, while breaking its monetary and fiscal policy dependence on the US. It’s not total monetary sovereignty, but it’s an improvement in the present situation.

Adopting BTC is a reasonable solution for El Salvador and other “dollarized” countries with a history of instability that want to break free from US control. Does this mean that BTC is going to take over the world? No, emphatically it does not.

Most countries don’t have that degree of dollar dominance, and developed countries don’t have that level of historical instability, either. There’s no need for them to adopt BTC either to escape USD dominance or establish monetary discipline.

And Second

El Salvador is seeking $1 Billion from the IMF, yet the discussions got complicated after Bukele fired its five Supreme Court judges in early May, following a landslide election victory. The Biden administration was not best pleased. If the IMF funding is looking in doubt, then what better way to generate inflows than by letting international hodlers purchase your goods and services with their favorite coin, right? Seeing as refunds will likely have to be in dollars, you’d imagine merchants will be instantly selling their bitcoin for traditional money on their exchange of choice to avoid volatility, creating a form of indirect dollar funding for the country.

Well, what do you think about this?

Thank you for reading all the way to the end of this podcast. You can leave your feedback and questions by tweeting to me at my Twitter handle @SaturdaySatoshi or you can leave a voice note at the link provided in the description. I will try my best to answer your questions and include them in the next episode and your feedback is much appreciated! Remember of all the things that I do Financial Advice is not one of them, to get financial advice contact your financial advisor!

Let’s meet next Saturday with another episode of Satoshi Saturdays!

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Satoshi Saturday is a weekly podcast talking about evolutions and advancements in the Crypto Ecosphere, 1 week at a time!