A moment of history was made when President Nayib Bukele’s proposal to make Bitcoin legal tender was recently approved by El Salvador's Congress.
With 62 out of 84 votes cast in favour, it Bukele's reasoning - that "it will bring financial inclusion, investment, tourism, innovation and economic development for our country", was greatly accepted by the lawmakers.
Under this new law "bitcoin must be accepted by firms when offered as payment for goods and services (and) tax contributions can also be made with it."
Long time digital currency community members will recall Japan was reported to have made Bitcoin legal tender in 2018, which was swiftly clarified to confirm Japan recognised it as property. El Salvador is the first country in the world to now recognise a digital currency as legal tender. El Salvador also recognises the US dollar as legal tender and will use the US dollar as the reference price for any accounting using Bitcoin.
Before the vote was put to Congress there were some reservations expressed around what this could mean for El Salvador's International Monetary Fund participation and program. Bukele is meeting with the IMF today and believes there will be no change to El Salvador's macro economics as a result of this move.
Bukele further gave reassurances that:
The use of bitcoin will be optional for individuals and would not bring risks to users, with the government guaranteeing convertibility to dollars at the time of transaction through a trust created at the country’s development bank BANDESAL.
This does contrast with the law passed which, consistent with recognised principles of legal tender, makes law a requirement that businesses accept Bitcoin for payment of debts, which puts a significant technological requirement on the business community.
The country has 90 days to roll out infrastructure to support the use of Bitcoin, as many businesses will be unlikely to have software in place to accept payments. Bitcoin can of course continue to be used by ex-patriots for remittances back to El Salvador, and depending on what kind of infrastructure is to be offered, we will see if adoption on the ground overcomes matters such as transaction fees (which at the time of writing are ~AUD$10 - making Bitcoin payments impractical for small transactions).
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