El Salvador becomes the 1st country to approve Bitcoin as legal tender

El Salvador’s legislative assembly has approved legislation making the cryptocurrency Bitcoin legal tender in the country, the first country to do so, just days after President Nayib Bukele made the proposal at a Bitcoin conference.

The digital currency can be used in any transaction and any business will have to accept payment in Bitcoin, with the exception of those lacking the technology to do so. The U.S. dollar will also continue to be El Salvador’s currency and no one will be forced to pay in Bitcoin, according to the legislation approved late Tuesday.

The exchange rate between the two currencies will be established by the market and all prices will be able to be expressed in Bitcoin — although for accounting purposes, the dollar will continue to be the currency of reference.

The government will promote training for people to be able to carry out transactions using Bitcoin.

The Economy Ministry noted that 70 per cent of Salvadorans do not have access to traditional financial services and it said the country “needs to authorize the circulation of a digital currency [whose] who value exclusively follows free market criteria” to stimulate growth.

“The Bitcoin law is ambitious, but simple,” Bukele said on Twitter. “Futhermore it is well structured to have zero risk for those who do not want to take risks. The government will guarantee the convertibility to the exact value in dollars at the moment of the transaction.”

El Salvador President Nayib Bukele speaks during a news conference in San Salvador on Jan. 6. Bukele’s party controls the legislature, allowing for the Bitcoin proposal to be quickly enacted into law. (Jose Cabezas/Reuters)

The president said it would increase financial inclusion, investment, tourism, innovation and economic development.

The law will take effect 90 days after its official publication. The Central Bank and financial system regulators will publish the implementing rules in the interim.

Bukele’s New Ideas party holds a supermajority in the new congress seated May 1.

Other countries in the region, including Venezuela and the Bahamas, have introduced digital currencies, although none had adopted the original cryptocurrency, Bitcoin, itself.

Opposition pans lack of study into the bill

Bitcoin, intended as an alternative to government-backed money, is based largely on complex math, data-scrambling cryptography — thus the term “cryptocurrency” — lots of processing power and a distributed global ledger called the blockchain, which records all transactions. No central bank or other institution has any say in its value, which is set entirely by people trading Bitcoins and which has wobbled wildly over time.

The legislation established a government trust fund that will guarantee the automatic convertibility to dollars.

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Carlos Carcah, a professor at El Salvador’s Superior School of Economics and Business, argued that adoption of Bitcoin as legal tender “is not necessary, nor convenient,” although he added, “as long as there is someone who accepts payment with Bitcoin, the same as they accept dollars, there wouldn’t be problems.”

He noted that Bitcoin is extremely volatile, so investors “run the risk of becoming rich and the next day being poor.”

Opposition lawmaker Rodrigo Avila of the conservative Arena party complained that the legislation was not sufficiently discussed by the Legislative Assembly before passage. There was no testimony from economic or cybercrime experts.

The move rekindled memories of the Nov. 30, 2000, decision to dollarize El Salvador’s economy, a move made in the middle of the night by the Arena-controlled congress.

El Salvador received some $6 billion US in remittances from Salvadorans living abroad last year, about 16 per cent of the country’s gross domestic product. Bukele has said Bitcoin could eliminate the costs of sending that money home.

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