June 22, 2021

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El Salvador implements bitcoin law, heralding a new era of global monetary inclusion

On Wednesday 9 June, the Legislative Assembly of El Salvador made history by formally adopt bitcoin as legal tender, with nearly three-quarters of the legislature voting in favor. If the new law works as intended, it has the potential to turn El Salvador into one of the world’s leading financial centers and impact the way people around the world use digital currencies.

History!Salvadoran President Nayib Bukele exclaimed on Twitter after the vote took place around 2 am Eastern time on June 9th. Indeed, the bill is historic on several fronts.

How will the Salvadoran standard of bitcoins work?

According to legal textAccording to the new law, “every economic agent must accept bitcoin as payment when offered by the person who buys a good or a service”: a clear definition of what it means to be a fiat currency. “Tax contributions can be paid in bitcoin”, along with all other legal obligations, and “bitcoin exchanges are not subject to capital gains tax, just like any other legal tender.” And “liabilities that in many cases are denominated in US dollars and that existed prior to the effective date of this law can be paid in bitcoin.”

The US dollar will also remain legal tender in the country and will be used as the “reference currency” for accounting purposes.

The bill anticipates many of the practical considerations associated with adopting bitcoin as legal tender.

First, the law creates exceptions for those “who do not have access to the technologies that allow them to transact in bitcoins.” The Salvadoran government “will promote the training and mechanisms necessary for the population to have access to bitcoin transactions”.

Second, the Salvadoran government will establish a $ 150 million trust with the Development Bank of El Salvador (Banco de Desarrollo from El Salvador, gold BANDESALE), which trades the bitcoin that companies and individuals receive at market prices in US dollars, for those who do not want to hold bitcoins. In this way, bitcoin adoption will grow organically in the country and those who find bitcoin volatility too risky will not have to keep it on their balance sheets.

“The purpose of the trust fund is not to make money, but to support this decision to have bitcoin as legal tender,” President Bukele said in a statement. Twitter spaces Twitter conference call hosted by Nic Carter of Castle Island Ventures. “It’s not about the Federal Reserve or our central bank.”

Third, while Salvadorans will be free to use any compatible wallet to interact with the new bitcoin-based monetary system, they will have the option of using an official government-approved smartphone wallet developed by Jack Mallers. ‘ Strike.

the strike helped pioneer in the use of bitcoin in El Salvador; her Lightning NetworkThe backend based on enables fast transactions with minimal costs – essential features for daily payments in a low-income country. (In the United States, professional footballer Russell Okung Strike used to convert his salary from the Carolina Panthers to bitcoin.)

A monetary version of disruptive innovation

The late Harvard Business School professor Clayton Christensen coined the term “disruptive innovation‘describe innovations that originate in’ a niche market that may seem unattractive or insignificant to established industrialists’, but ultimately redefine an industry. Consider how low-cost Japanese automakers like Honda and Toyota entered the US market with reliable, affordable, and low-margin compact cars, eventually making their way into the higher-margin luxury segment with Acura and Lexus. Detroit’s Big Three initially ignored and mocked Japanese cars, but ultimately lost market share and requested federal bailouts to survive.

What El Salvador is doing with bitcoin follows exactly the same pattern. Many people in the US and Europe make fun of bitcoin and criticize its volatility and high transaction costs, believing that the US dollar and the euro work perfectly, without the need for alternatives.

El Salvador sees things differently. A bitcoin currency standard, supported by the Lightning Network, allows Salvadorans living in the United States and elsewhere to send money home without the high fees associated with Western Union and other international issuers. If all Salvadoran emigrants used the Lightning Network for remittances, an extra billion dollars could flow into El Salvador’s economy each year.

Additionally, smartphone frontends like Strike allow for easy money transfer, denominated in dollars or bitcoins, for everyday purchases such as grocery shopping. As mentioned above, with the new Salvadoran system, traders can instantly convert received bitcoins into dollars or keep bitcoins in their account if they wish.

The Salvadorans tested this system for the first time in El Zonte “Bitcoin Beach”Project, and it is a success. in a insightful interview with Stephan LiveraBitcoin Beach founders Michael Peterson and Nicolas Burtey described how their wallet design has evolved to meet the needs of low-income Salvadorans.

“Transaction fees [with the base layer Bitcoin network] continued to rise. And we saw transaction fees of $ 3, $ 4 … we knew we had to move something, otherwise it wouldn’t be sustainable, “Peterson said. This problem prompted Peterson and Burtey to implement the Lightning Network on Bitcoin Beach, eliminating the problem of high transaction costs.

In time, if El Salvador’s bitcoin law is successful, the country will have demonstrated for the first time that bitcoin can be used by a sovereign nation-state. both as a store of value, like gold, and also as a medium of exchange for day-to-day transactions.

Once El Salvador proves that bitcoin can be used in this way, in a low-income country where 70% of residents have no bank accounts, the country will have proven that bitcoin is usable. everywhere in this way, including the United States.

Carbon-free bitcoin mining in El Salvador

One of the most interesting things to come out of Nic Carter’s Twitter Spaces conversation with President Bukele was the opportunity to make El Salvador a carbon-free bitcoin mining center. Elon Musk and other bitcoin critics have argued that the computing power used to secure the Bitcoin network excessively increases atmospheric carbon dioxide.

Coincidentally, El Salvador is rich in clean, carbon-free geothermal energy. Almost a quarter of electricity in El Salvador is generated by volcanic heat which requires no CO2 emissions. Two thirds of El Salvador’s geothermal energy remains untapped: Enough to power 3 to 4% of the Bitcoin network.

During the call, Bukele was asked whether El Salvador was interested in setting up bitcoin mining facilities in the country. He said the thought hadn’t occurred to him before, but the idea had significant potential:

We have a plan, it has nothing to do with bitcoin, but we have geothermal energy here … volcanoes [that turn] water in water vapor and which produces energy. So we produced that energy [beginning] 50 years ago. But… we lose a lot of energy by transporting energy from geothermal plants to cities. So we want … on the edge of factories … to promote these industrial parks where you can install your factory and get a cheap, 100% clean, 100% renewable, 0% CO2 emissions product [energy]. And we didn’t want to do it because of bitcoin, but because people want to invest in factories that don’t have a carbon footprint … Someone probably wants to create a mining facility with renewable, clean and low-cost energy.

Sure enough, later in the day, June 9, Bukele tweeted that he had instructed “the president of LaGeo,” the state-owned geothermal energy company, to set up “a plan to provide bitcoin mining facilities with very cheap, 100%. clean, 100% renewable, [zero-emissions] energy from our volcanoes. ”

Energy costs are the biggest expense for bitcoin miners; in El Salvador, miners could generate significant revenues for the country and significantly reduce the cost of electrification of rural areas.

Will other countries follow El Salvador’s example?

In response to El Salvador’s bitcoin moves, politicians from many other Latin American countries have expressed a desire to bring a bitcoin standard to their country. The first was Carlitos Rejala from Paraguay, who: suggested on Twitter that Paraguay was working on such a project with PayPal.

Panamanian lawmaker Gabriel Silva followed suit, tweeting: “This is important. And Panama cannot be left behind. If we want to be a true hub for technology and entrepreneurship, we need to support cryptocurrencies. We prepare a proposal to be presented to [legislative] Meeting. If you are interested in building it, you can contact me. ”

Legislators of Brazil, Mexico, Colombia and Argentina quickly followed. None of these figures have the same influence in their governments as President Bukele in El Salvador, but some of them may very well be able to follow El Salvador’s example, creating a multinational consortium of countries that use bitcoin as legal tender.

While other countries do not follow El Salvador’s lead, the fact that a single sovereign nation-state would adopt bitcoin as legal tender is significant.

El Salvador’s bitcoin law creates what Bukele calls “a haven for cryptocurrencies,” a safe and predictable legal environment for bitcoin entrepreneurs to build new and innovative tools. That environment will attract many of the industry’s most talented and creative people to El Salvador, enrich indigenous Salvadorans, and accelerate the development of a more inclusive global financial system.