How Do You Wanna Pay?
Alright folks, hold onto something tight because this one is gonna be a doozy!
On June 24th, 2021, President Nayib Bukele announced in a national address that a new law adopting Bitcoin as a legal tender has been passed and will be implemented on September 7th. This new law marks the beginning of a new age of digital currency use as El Salvador will become the first country in the world to accept cryptocurrency in economic circulation. Bukele asserts that this move, “will bring financial inclusion, investment, tourism, innovation, and economic development” to El Salvador. So before we explore what this law entails and what the possible effects might be, let’s first dive into what Bitcoin actually is, how it works, and how it’s created.
Bitcoin, in my opinion, is INCREDIBLY complicated and I am by no means an expert, so I will try my best! A bibliography will be available below for those wanting to explore a little more, and if there’s something I missed feel free to drop a comment!
P.S. I still haven’t quite figured out how to use footnotes, so if you would like specific references feel free to ask!
What is Bitcoin?
Launched anonymously in January of 2009, Bitcoin is the first and most widely recognized cryptocurrency in the world. Essentially Bitcoin is digital money, as Bitcoin.com describes as a “peer - to - peer exchange of value in the digital realm through the use of a decentralized protocol, cryptography, and a mechanism to achieve global consensus on the state of a periodically updated public transaction ledger called a block chain”. If you’re anything like me, that last quote made absolutely no sense so let’s break it down.
There are seven basic features of Bitcoin:
Decentralized - There is no CEO associated with Bitcoin, and no one owns or controls the Bitcoin network. Instead there is a network of willing participants who agree to the rules of a set protocol, decided by the participants.
Distributed - All transactions on Bitcoin are recorded on a public ledger known as a ‘blockchain’. This block ensures that all transactions across the network are following the rules. The block chain relies on people voluntarily storing copies of the ledge and then running the Bitcoin protocol software which in turn means that with Bitcoin there is no network suffering downtime nor is any information lost.
Transparent - New transactions are added to the blockchain ledger any time Bitcoin is used as a currency. Through the transparency it is possible to see who owns any amount of Bitcoin at a single time.
Peer - to - Peer - Even though the blockchain stores information of transactions, payments go directly from the sender to the receiver which in turn, requires no need for a third party to act as an intermediary. Essentially, Bitcoin is able to bypass fees associated with transactions through banks.
Pseudo-anonymous - Transactions are tied to addresses that take the form of randomly generated alphanumeric strings
Censorship Resistant - Extremely difficult for authorities of any nationality to ban individuals from using Bitcoin or seizing their assets. This resistant promotes worldwide economic freedom and acts as a counterforce to global authoritarianism
Public - Transactions are recorded and publicly available for anyone to see, yet efforts to further enhance privacy are currently underway
Easy enough to understand right? Well buckle your seat belts folks it’s about to get a lot more complicated. The aforementioned basic features of Bitcoin translate into three economic features which are:
Fixed Supply - There is a set amount of Bitcoins which amounts to a final tally of 21 million coins. Despite the fixed supply, Bitcoins are able to be decided thus one Bitcoin can be broken into 100 million pieces
Disinflationary - Inflation reduces because new Bitcoins are added to the available supply which gradually decreases along a set schedule built into the code. At 50 Bitcoins per block (new blocks are added approximately every 10 minutes), issuance of Bitcoins is cut in half approximately every four years. For example, in May 2020, the third halving reduced the issuance rate from 12.5 to 6.25 Bitcoins per block. Which translates to 87.5% of the total Bitcoins being mined.
Incentive Driven - Miners are driven by profit to contribute the resources needed to maintain and secure the Bitcoin network. The process is known as Proof-of-Work (PoW) where miners compete to add new blocks to the chain or ledger.
So how does Bitcoin as a legal tender affect El Salvador?
El Salvador, similar to many Central American countries, relies heavily on remittances which contributes around $6 billion U.S. dollars or one fifth of the country’s’ overall GDP in 2019. The heavy reliance on remittances is one of the leading motivators for the enactment of Bitcoin as many Salvadorans (around 70%) do not have access to traditional financial services such as bank accounts or credit cards. Essentially, the adoption of Bitcoin will permit individuals working abroad to send money directly to their families without the need for a bank account or paying excessive fees, but many are waiting to see if this adaptation will actually cut the cost of sending remittances.
In 2001, El Salvador abandoned their own currency, the colon, and adopted the U.S. dollar. Since this adaptation, the average annual inflation rate of 2.03% is the lowest in Latin America. This combined with a variable interest rate of 7% demonstrates that dollarization has created macroeconomic stability for El Salvador. This makes the transition to using Bitcoin much easier for individuals, yet the U.S. dollar will still be the country’s main currency. Under this new law, bitcoin must be accepted by firms when offered as payment for goods and services, yet President Bukele contradicts this as he announces, “the use of bitcoin will be optional, nobody will receive bitcoin if they don’t want it…If someone receives a payment in bitcoin they can choose to automatically receive it in dollars”. Later it was clarified that business are required to accept the digital currency UNLESS they lack access to the technology to do so.
So how will this be implemented?
Athena bitcoin plans to invest over $1 million to install some 1,500 cryptocurrency ATMs specifically in areas where most residents retrieve their remittances. These ATMs will be utilized to buy bitcoin or sell bitcoins for cash. Meanwhile, the government in collaboration with CABEI (Banco Centroamericano de Integracion Economica) intends to install 200 of their own ATMs and 50 in-person kiosks while promoting training for these machines to better allow access to bitcoin transactions. To ensure convertibility and minimal risk, the government has created a $150 million trust through the development bank BANDESAL.
The government has announced that the official bitcoin wallet is Chivo, a digital wallet, which will allow individuals to control their finances from their personal devices. In order to promote the use of bitcoin, the government plans to deposit $30 into the wallet of each individual who downloads the app. For those living in rural areas, such as the community of Los Tehuistes, the government intends to build satellite infrastructure for these communities to connect to the internet. One of the benefits hoped to gain through this integration is that when transferring money there will be no commissions which could save individuals up to $400 million per year. Nevertheless, the government plans to maintain some control over the use of the app as money laundering laws will still apply and purchases will not be anonymous so regulators can track them.
To further facilitate the use of bitcoin in El Salvador, President Bukele has instructed the state - owned geothermal electric firm LaGeo to develop a plan to offer bitcoin mining facilities by using renewable energy from the country’s volcanos. The intention behind this move is that mining consumes large amounts of electricity, and this new hub will run off clean energy furthering the Salvadoran commitment to confronting climate change while simultaneously bringing in economic opportunities to the nation. Supporters of this plan hope that these changes will open new opportunities for 70% of those who don’t have access to traditional banking, will attract foreign investment and turn El Salvador into a worldwide hub for cryptocurrency.
But will this gamble by President Nayib Bukele pay off?
Despite these potential benefits, Bukele’s plan is still extremely vulnerable and risky. A survey conducted by pollster Distruptiva, affiliated with the local Francisco Gavidia University, concluded that of 1,233 people across El Salvador 54% believe that the adoption of bitcoin was “not at all correct” while only 24% described it as “only a little correct”. These responses continue to spell doom for Bukele as less than 20% approved the cryptocurrency plan, 46% of respondents knew absolutely nothing about bitcoin, and 65% said they would not be open to being paid in cryptocurrency.
In a different study done by El Salvador’s Chamber of Commerce, 92% of over 1600 respondents said “they do not agree with making the acceptance of bitcoin mandatory, and 92% do not want to receive their salaries in cryptocurrency, and 82.5% of respondents do not want to receive bitcoin remittances”.
Controversy continues even further with the concern that Bukele implemented this new law as publicity stunt to distract from his authoritarian tendencies. Even though money laundering laws will still apply to the wallet & purchases will not be anonymous, this new law has created many concerns over government corruption and international money laundering.
Nevertheless, Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise published in their article Studies in Applied Economics: El Salvador’s Bitcoin Law is Destined to be Caught in the FATF’s Regulatory Web, argues that “it’s abundantly clear that if Bitcoin Law is actually implemented, El Salvadoran banks, merchants, and their customers will cross swords with Financial Action Task Force regulators and be ensnared in the FATF’s web of regulations”.
The FATF are to, “set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”. The FATF releases two regularly updated documents: The FATF Recommendations Guide and the FATF Virtual Assets Red Flag Indicators Report. The aforementioned provides nations, “with standards by which to detect, penalize, and prevent money laundering, terrorist financing, and other related, illegal behaviors” while the latter “outlines suspicious behaviors concerning virtual assets that violate the FATF Recommendation Guide”. If a nation fails to comply with the Recommendations Guide they ear a spot on the list of “Jurisdictions under Increased Monitoring" or the Grey-list. while failure to cooperate with the recommendations puts nations on a Black-list which can result in, “account seizures and fines, economic sanctions, trade restrictions, and criminal charges for the financial parties involved”. The Johns Hopkins report has selected 27 out of 58 behaviors that will be difficult or even impossible for Salvadoran banks, merchants, and customers have to comply with. They additionally argue that Burkele’s administration has been, and probably still is, involved in corruption, obstruction, and actions that undermine the democratic processes and institutions. So much so that 14 high-level personalities from El Salvador has been listed by the U.S. State Department’s report on corruption. Currently there are 17 Latin American - Caribbean countries flagged, these are: Antigua and Barbuda, Argentina, The Bahamas, Barbados, Bolivia, Cayman Islands, Cuba, Ecuador, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama, Paraguay, Trinidad and Tobago, and Venezuela.
In addition to the concern over corruption, the value of bitcoin is extremely volatile, as of today, September 2, 2021 at 10:40 am the value of 1 bitcoin is 49,550.35 U.S. dollars, meanwhile the value of bitcoin on September 2, 2021 at 8:10 am was 50,261.20 U.S. dollars.
So will El Salvador flourish or perish under this new law? Only time will tell, and with five days left till the implementation, the consequences or benefits will be revealed in the future. If there are any questions on bitcoin, mining, El Salvador implementation, or the FATF please drop a comment or email!
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