The story of El Salvador accepting bitcoin and how it may help the country.
What’s New?
El Salvador has become the first country in the world to approve bitcoin as legal tender. A supermajority of the country’s legislature voted in favour of President Nayib Bukele’s proposal for the nation to adopt bitcoin. 62 members of the legislature voted in favour of the bill out of 84 possible votes. On top of this, there won’t be any capital gains tax on bitcoin after bitcoin becomes the legal tender. Also, immediate permanent residence will be provided to crypto entrepreneurs in the country.
Helping Merchants
But we all know that bitcoin is highly volatile. So, wouldn’t this move affect business owners? Let’s say that you charge 0.0005 bitcoin for a product that you sell today, and the price of bitcoin falls tomorrow. This means, the bitcoin that was paid to you in exchange for your product today might not be worth the same tomorrow. So, you might want to convert that bitcoin into dollars, but you don’t want to take the risk of convertibility. What can you do then? That’s where the El Salvador government comes to the rescue.
This new law means every business must accept bitcoin as legal tender for goods or services, unless it is unable to offer the technology needed to do the transaction. But we all know that bitcoin is highly volatile. So, wouldn’t this move affect business owners? Let’s say that you charge 0.0005 bitcoin for a product that you sell today, and the price of bitcoin falls tomorrow. This means, the bitcoin that was paid to you in exchange for your product today might not be worth the same tomorrow. So, you might want to convert that bitcoin into dollars, but you don’t want to take the risk of convertibility. What can you do then? That’s where the El Salvador government comes to the rescue.
Bukele said that the government will establish a trust at the Development Bank of El Salvador to instantly convert bitcoin to U.S dollars for assuming merchants’ risk. It will hold around $150 million in dollars in the trust fund. The trust fund will sell some of the bitcoin it receives for dollars to replenish the fund.
The Benefits
The other thing is that the economy of El Salvador depends heavily on remittances, or money sent from home from around. This makes up around 20% of the nation’s gross domestic product (GDP). More than 2 million Salvadorans who live outside the country send back over $4 billion (£2.8 billion) each year. And this move will help Salvadorans living abroad to send money home easily, thus benefitting the economy.
The other problem with El Salvador is that only 30% of Salvadorans have access to financial services. Hence, this move will benefit the 70% of the citizens who do not have bank accounts by opening up financial services. So, this move of making bitcoin a legal tender will bring financial inclusion, investment, tourism, innovation and economic development for the country.
Zooming Out
Many critics are saying that bitcoin is not suitable to be an effective currency because of the wild price swings, while some on Twitter are saying that the law change is a remarkable accomplishment and a game changer. The opinions are divided, but we can’t say what would happen in the future and whether this move will actually help the country or not. In the forthcoming days, government officials from El Salvador will meet the International Monetary Fund to discuss the plan. We have to wait and how do they plan to implement the law and how much it helps the nation’s economy and its citizens.
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