El Salvador, based in Central America, is the first country in the world to make Bitcoin legal tender. Congress has approved the initiative taken by President Nayib Bukele by a clear majority of votes and the law will enter into force in 90 days. Salvadorans suffering from poverty can use bitcoin as a means of payment in everyday life, as well as transfer money to family members without large commissions.
El Salvador is a poor country in Central America
With 6.5 million inhabitants, El Salvador is the most densely populated state on the American continent. Guatemala and Honduras are the neighboring countries. Throughout its existence, El Salvador has suffered from violence, natural disasters, and civil war.
El Salvador is a poor country with an economy largely based on services and agriculture. Due to poverty, many Salvadorans work abroad and send money to their families who still live in El Salvador. In recent years, up to a fifth of El Salvador’s GDP comes from remittance payments.
Corruption is also a serious problem. Only about one in three citizens have a bank account or credit card. In practice, the economy revolves around cash. The official currency of the country is the US dollar. El Salvador abandoned its own currency in 2001.
Jack Mallers and strike app
Jack Mallers and the Strike app are essential factors in El Salvador’s bitcoin adoption. Strike, which has recently gained a lot of popularity, is leveraging Bitcoin’s lightning network. The app makes it possible to send small amounts of money in real-time and free of charge.
Jack Mallers saw plenty of potential for his product in El Salvador. For starters, up to 70% of the inhabitants of El Salvador have no bank account.
An even more essential reason is the remittance market. It means that many Salvadorans work in other countries due to the poor economic situation of their home country. These workers are sending part of their salaries back home.
Sending money from one country to another is not easy when the receiver doesn’t have a bank account. Salvadorans are forced to use expensive services such as Western Union, which may charge up to 30% commissions.
It will come as no surprise that there is a demand for a fast and free money-transfer service. Jack Mallers has been actively doing fieldwork in El Salvador to get citizens of the country covered by the Strike app.
Law presentation and its adoption
The making of Bitcoin as legal tender was pushed forward by president Nayib Bukele. The president announced his proposal via video greeting at the Bitcoin 2021 conference in Miami, along with Jack Mallers.
According to the proposal, the exchange rate of Bitcoin is determined in the free market. In the future, products and services will be priced in Bitcoin and Salvadorans will be able to pay taxes with bitcoins.
— Nayib Bukele 🇸🇻 (@nayibbukele) June 9, 2021
An essential point is that exchanging dollars for bitcoins (and vice versa) is not a taxable event. Citizens can trade between currencies as they wish, without being taxed for capital gains.
Once the law will be enforced, all merchants must accept Bitcoin as a payment. However, if someone does not want to hold Bitcoin, the state offers to buy bitcoins from its citizens with dollars. Merchants can instantly convert their bitcoins to dollars if they wish to do so.
The law makes it possible for Salvadorans to live and manage all their expenses using Bitcoin. However, this is not mandatory. The U.S. dollar will remain as an official currency, just like before.
El Salvador Congress approved the Bitcoin law by a majority of 62/84 votes. The act enters into force in August 2021.
Impact on the daily lives of Salvadorans
In El Salvador, class differences are huge and a big part of the population lives in extreme poverty. Corruption is seriously ingenious and the system is not capable of caring for its citizens. Hardly any money is invested into the country from abroad – with the exception of remittance payments.
In poor countries in Central and South Africa, it is common for the younger generation to go and work in countries with higher wages. The gap in living standards is often so big that a small salary in the United States can support a bunch of people in a country like El Salvador.
The problem with sending money is the high transfer fees, which can take a significant slice of the amount being sent. For this problem, accepting bitcoin as an official currency, as well as deploying the Strike app, could be an excellent solution.
The ability to acquire bitcoins easily and legally gives Salvadorans a chance to prosper financially. The recent change in the law might significantly increase the country’s GDP and overall economic situation.
Great upheaval for the entire cryptocurrency market
El Salvador’s amendment has been greeted with joy among Bitcoin enthusiasts. Throughout its history, Bitcoin has received a lot of cynism and ridicule, but ending up as the country’s official currency is a big win for the entire industry.
As soon as El Salvador approved the law, the Colombian president’s assistant contacted Jack Mallers on Twitter regarding the Strike app.
It's happening. pic.twitter.com/Hiybpn4IP2
— Documenting Bitcoin 📄 (@DocumentingBTC) June 8, 2021
The decision-makers in Argentina, Brazil, and Panama are also known to have discussed this matter. It might not be long until the next South or Central American country makes Bitcoin as legal tender.
It makes sense that poor countries of South and Central America are interested in Bitcoin. The Bitcoin revolution could very well continue in Africa, as well as Asia. Both continents have millions of people living without bank accounts or access to daily banking services.
Resistance is also likely to be expected. The U.S. doesn’t want its dollar to be dropped out and replaced by Bitcoin anywhere. We have also seen IMF send warnings to El Salvador.
Image credit: Flickr / Quoteinspector.com