El Salvador: Bitcoin will become legal tender, alongside the US dollar

El Salvador, which uses the US dollar as the go-to fiat, has become the first country in the world to adopt bitcoin as legal tender. With 62 out of 84 possible votes, lawmakers voted in favor of the move to create a law to adopt bitcoin, despite concern about the potential impact on El Salvadors’s program with the International Monetary Fund.

President Nayib Bukele’s is known for his love of technology is expecting that the new law will bring financial inclusion, investments, tourism, innovations and economic development to their country.

Moreover, a former marketing executive, has suggested bitcoin could make it easier for Salvadorans living abroad to send home the remittances which amounted to $6bn in 2019 – a fifth of the country’s GDP.

The use of bitcoin will be optional for individuals and will not bring risks to users, Bukele said, with the government guaranteeing convertibility to dollars at the time of transaction through a trust created at the country's development bank BANDESAL.

Under the law, bitcoin must be accepted by companies when offered as payment for goods and services. Tax contributions can also be paid in the cryptocurrency. The bitcoin-dollar exchange will be rated set by the market.

The El Salvador government will maintain a $150 million trust fund to offer the BTC to USD conversion services. It will sell some of the received Bitcoins to replenish the trust fund.

The bill, which was proposed by Bukele himself, touches many areas related to the use of cryptocurrencies. It recognizes Bitcoin as a legal tender, scraping all associated capital gains tax. In addition, the country will accept taxes in Bitcoin, and the US dollar will be the ‘reference currency’ when denominating prices.

Also, Bukele is considering promoting Bitcoin mining at a time when the major mining industry is facing hostility in China. The El Salvadoran government officials will discuss its crypto plans further at a meeting with the International Monetary Fund in the coming weeks.

In general, bitcoin is very popular in countries with collapsed monetary systems. Most analysts believe that accepting bitcoin as a legal tender does not improve the economic situation in El Salvador. Given the cost of transactions, most likely it will not be as profitable as it looks at first glance.

El Salvador is a country with a low level of economic development, but it is likely that the acceptance of Bitcoin in El Salvador will motivate other countries with a similar level of economic development to take a closer look at their currently used settlement currencies.

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