El Salvador has become the first country in the world to adopt bitcoin as legal currency.The Congress on Wednesday has approved President Nayib Bukele’s proposal to embrace the cryptocurrency.Bitcoin’s use as legal tender will begin in 90 days, with the bitcoin-dollar exchange rate set by the market.Under the law, bitcoin must be accepted by firms, including McDonalds, when offered as payment for goods and services.Exemption is given to businesses which have no access to bitcoin technology.
The government will act as a backstop for entities that aren’t willing to take on the risk of a volatile cryptocurrency.Even tax payments can be paid in the cryptocurrency. Even if a merchant does not want to take the risk of convertibility, he has to accept bitcoin because it’s a mandated currency. He can ask the government to exchange his bitcoin to dollars immediately or use the market for conversion. The government is guaranteeing convertibility to dollars at the time of transaction through a $150 million trust created at the country’s development bank BANDESAL.The Development Bank’s trust fund would sell some of the bitcoin it receives for dollars to replenish the fund.
At this moment, the government and Central Bank do not currently hold any bitcoin.
Bukele has touted the use of bitcoin for its potential to help Salvadorans living abroad to send remittances back home, while saying the US dollar will also continue as legal tender.In practice, El Salvador does not have its own currency.
El Salvador relies heavily on money sent back from workers abroad.Remittances by Salvadoreans mainly in US are about $6 billion or around a fifth of GDP, one of the highest ratios in the world.
The cryptocurrency offers, in theory, a quick and cheap way to send money across borders without relying on remittance firms typically used for such transactions. The government will promote training and mechanisms to allow access to bitcoin transactions.
The El Salvador announcement has pushed up the value of bitcoin by six per cent to $35,200.
Bukele has instructed state-owned geothermal electric firm LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country’s volcanoes.He has offered citizenship to people who showed evidence they had invested in at least three bitcoins.Outside the United States, countries with the highest crypto production and trading volumes are all developing nations including China, Colombia and India. The bitcoin experiment of El Salvador will be watched by the enthusiasts of the crypto currency from around the world. There are challenges of volatility of bitcoin as well as the poor internet infrastructure and usage in the country.
El Salvador, the smallest country (in area) in Central America with 6.5 million people, has huge problems. Besides poverty and other developmental issues, the country is the victim of violence and crime committed mostly by the notorious gangs. The main issue is the ongoing gang violence and crime.The country has become notorious with one of the highest murder rates in the world. Mara Salvatrucha, popularly known as MS-13 and the Barrio 18 (18 th street gang) are the two dominant gangs which hold the country to ransom with killings, crimes and drug trafficking.The rivalry between these two became so violent at one stage in 2012, the government intervened and brokered a ceasefire between MS 13 and the Barrio 18.In order to bring the two sides to the negotiating table, the government relaxed conditions in the prisons in which the members of the two gangs were held.Following this peace deal, the murder rate had dropped immediately.But this truce broke down in 2014 and crime has gone up again.
It is because of the violence in the country that many are fleeing, trying to enter US and seeking asylum. The second major problem of El Salvador is the rampant corruption.Last week, the former first lady Ana Ligia de Saca, who was found guilty of illicit enrichment, was sentenced to 10 years in prison and ordered to repay $17.6 million to the state.Her husband, former President Tony Saca, is already serving a 10-year sentence since September 2018.
The court had asked him to return to the state 260 million dollars siphoned by him.Lot of money for the small country.Ana Ligia de Saca’s brother Oscar Edgardo Sol Mixco had received a similar sentence of jail and fine earlier on corruption charges.While Saca is the first Salvadorean president to be jailed for corruption, both his predecessor and his successor in office have also been accused of corruption His predecessor, Francisco Flores, was accused of diverting a $15m-donation given to his government by Taiwan to help victims of the earthquakes which hit El Salvador in 2001.
Mr Flores died in 2016 while under house arrest awaiting trial.Mauricio Funes, successor to Saca has been accused of using public funds for his personal use.He fled to Nicaragua where he has got asylum two years ago.Some of the previous presidents of the country have been accused and convicted of massive corruption.
The current President Nayeb Bukele is young and tech savvy.He is using bitcoin as part of his adventurous new agenda and experiment.The country needs solutions urgently for the crime, corruption and poverty more than the bitcoin experiment.The author is an expert in Latin American affairs.
