cryptocurrency as legal tender

With its name, many people think Cryptocurrency is accepted as a legal tender just like other currencies in the world. But it’s not true, till now no any country has declared any Cryptocurrency as legal tender to accept just like money.

But on June 5 at the Bitcoin 2021 conference, President Nayib Bukele made a pre-recorded announcement that caused a local media hysteria with a huge worldwide echo: El Salvador would be the first country in the world to adopt Bitcoin as legal tender.

On June 8, just three days after that statement, the Bitcoin Bill was approved by the Legislative Assembly, denoting that in next three months, El Salvador will implement this initiative.

Translation: With 62 votes, the legislative plenary session approves the #LeyBitcoin [that allows] El Salvador to adopt #Bitcoin as a legal currency. #Thenewassembly continues to make history,! a tweet from the Legislative Assembly said.

Though, the decision has been taken by the Government but do you want to know how El Salvador came to this decision and what its initial implications are some concerning factors you need to know. In order to update our readers we brought this news with more in-depth analysis below.

Why does El Salvador want to adopt Bitcoin as an official tender?

El Salvador, with a population of around 64 lakh and an area slightly bigger than Meghalaya, depends heavily on remittances sent by Salvadorians from abroad. Around a quarter of the country’s citizens live in the US, and in 2020 they sent home more than $6 billion in remittances despite the pandemic– making up more than 20% of the GDP.

Addressing the issue, Bukele said that currently “a big chunk of those 6 billion dollars is lost to intermediaries. By using Bitcoin, the amount received by more than a million low income families will increase in the equivalent of billions of dollars every year.”

Bukele also said that Bitcoin will help increase financial inclusion in El Salvador, where 70% of the population does not have a bank account and relies on the informal economy.

“Financial inclusion is not only a moral imperative, but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions,” he said. “We hope that this decision will be just the beginning in providing a space where some of the leading innovators can reimagine the future of finance.”

Who is Nayib Bukele?

Bukele, who is described as an anti-establishment populist, is El Salvador’s first president in 30 years to win the top office without the support of one of the country’s major parties. He won the presidential election in 2019 on an agenda of fighting corruption and gang violence, and currently enjoys an approval rating of over 85%.

El Salvador President Nayib Bukele has touted the use of Bitcoin for its potential to help Salvadorans living abroad to send remittances back home [File:Reuters]

Before becoming president, the media-savvy leader worked at his father’s marketing company before getting elected as the mayor of San Salvador, the nation’s capital, and of a suburb.

Critics, however, have blamed Bukele for moving El Salvador in an increasingly authoritarian direction. This year, Bukele removed five judges of the Supreme Court and the attorney general– officials who had been critical of his drastic measures during the pandemic. The move was denounced as a power grab.

Bukele got along well with former US President Donald Trump, but has had a more tense relationship with the current Biden administration, which last month asked him to reverse his move to fire the top judges and the attorney general. Bukele refused.

What has been the reaction to Bukele’s Bitcoin announcement?

The proposal is expected to sustain Bukele’s popularity in El Salvador, where he is seen as an innovator, as well as improve the appeal for Bitcoin, which has witnessed major fluctuations this year. It is also seen as good news for cryptocurrencies in general.

However, some crypto experts have criticised the move saying that El Salvador could have looked at crypto options that would work better as a currency than Bitcoin, whose three transactions-per-second processing rate is seen as too slow compared to other virtual tenders such as Bitcoin Cash or Monero.

Then, there are those entirely sceptical of private cryptocurrencies, who complain about the lack of a central regulating authority, potential for fraud and money laundering, high energy costs and extreme volatility.

How it can affect the Bitcoin market?

According to experts, El Salvador’s move has changed the fundamentals of the bitcoin market. Moreover, the Latin American nation’s announcement is expected to address the concerns of many individuals. The most common objection that people had regarding bitcoin is its backing and volatility.

“While these complaints are valid, they are valid only if you compare them to the top 30-40 currencies. There are 14-15 countries, which don’t have their currency and they typically use the US dollar.

As a result, bitcoin or any other form of cryptocurrency is as good for them as these countries are dependent on the US monetary system and the policy,” said Ajeet Khurana, founder, Genezis Network, a think tank for crypto startup investments.

According to Khurana, before the year 2021 gets over, there will be at least 4-5 more nations adopting bitcoin as their sovereign acceptable currency.

“In terms of people’s concerns, a worry that bitcoin has no intrinsic value will go away now. Everything about this move is positive, however, how positive, will depend on the way global establishments such as central banks and the government react to it,” said Khurana.

Impact on Indian Investors

According to experts, EI Salvador’s decision to make bitcoin a legal tender will boost financial inclusion in their country as majority of the population does not have access to formal banking channels.

“In India, our approach towards crypto is different, we don’t see it as a legal tender but as an asset class. Indian investors have shown their faith in crypto even during the massive price fluctuations because they have an investment horizon of two-three years.

Also Read: Should You Invest in Bitcoin and Cryptocurrency: 5 Things to Know

We are eagerly waiting for CBDC in India which will open up new avenues of growth for the digital asset industry,” said Shivam Thakral, CEO, BuyUcoin.

A cryptocurrency is a digital form of money that can be used to pay for some transactions online.

As with “real” currencies, one, 10, or millions of Bitcoins can be owned. Unlike real currencies, cryptocurrencies only exist online and are not backed by any government or central bank.

Crypto devotees say the currencies represent the economy of the future. But ultimately, their value depends on their limited supply and the number of people who chase after them.

Also Read: Why World Economy is Slowing Down & Running Low: Bloomberg Report

The cryptocurrency market grew to more than $2.5 trillion in mid-May last year, according to the CoinMarketCap page, driven by interest from increasingly serious investors from Wall Street to Silicon Valley.

But the volatility currency – currently priced at $36,127 – and its murky legal status has raised questions about whether it could ever replace fiat currency in day-to-day transactions.

News Sources: Aljazeera, Live Mint & Indian Express