Famously a coin without a country, bitcoin may soon get a national home in El Salvador.
At the close of the highly-anticipated Bitcoin 2021 conference in Miami last Saturday, President Nayib Bukele announced in a pre-recorded video that he planned to send a bill to congress within the week that would make Bitcoin a legal tender in the Central American country.
The Salvadorian Congress has since approved the bill with 62 out of 84 votes — which perhaps isn't surprising given Bukele's history of keeping a firm grip on the national government, including the controversial decision to replace the country's supreme court and attorney general last month. The president's party, New Ideas, achieved a sweeping majority in a March election.
Bukele isn't alone among his countrymen in touting the wonders of bitcoin, however. In the wake of the announcement, several legislators added red laser eyes to their social media avatars — a common practice among bitcoin-believers for going public with their support.
El Salvador is also home to Bitcoin Beach, a small beachside community known as El Zonte that is integrating bitcoin within its local economy, after an anonymous donor jump-started the process with a massive infusion of the digital currency back in 2019.
Now it's taking bitcoin nationwide, and other Central and South American countries are coming forward with their own proposals in what's shaping up to be a regional race to become the next bitcoin hub.
Carlitos Rejala, a congressman and the national deputy of Paraguay, tweeted after Bukele's announcement that he would soon roll out similar legislation to make bitcoin legal tender.
Congressman Gabriel Silva of Panama followed suit, framing the need to embrace bitcoin as essential to not getting left behind in the race to attract technology companies.
"This is important," he tweeted. "And Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies."
Individual lawmakers from Brazil and Mexico — sporting their own laser-eyed avatars — have also chimed in with their support, but it's unclear yet if any of them will take the plunge like El Salvador.
"A cascading effect is likely because bitcoin’s game theory asserts that if others are holding bitcoin then it’s a good idea if you do too," said Adam Back, CEO of Blockstream, a bitcoin infrastructure company that is joining talks with the Salvadoran government to extend access to the cryptocurrency. "Bitcoin sometimes moves faster than 'internet time', with surprising developments playing out faster than anyone expects."
Outside of Latin America, the news has generated considerable buzz among crypto-watchers, who over the past few days have debated what exactly this means for the digital currency.
Devil's in the Details
In a strictly legal sense, status as legal tender simply means a currency must be accepted for debt-payments — though not necessarily all payments. The new law does not mean that El Salvador plans to replace the U.S. Dollar as its main currency. The country's trade minister Miguel Kattan said as much to a local news outlet Monday, noting that any bitcoin activity will be tethered to the dollar exchange rate.
Indeed, the actual bill states that "for accounting purposes, the USD will be used as the reference currency" and that bitcoin users will have "automatic and instant convertibility from bitcoin to USD if they wish."
At the same time, the new law allows citizens to pay taxes in bitcoin, express prices in bitcoin, and avoid capital gains taxes on bitcoin exchanges.
These more expansive uses of bitcoin suggest Bukele may have a broader definition of legal tender in mind for bitcoin — but they also come with their own set of concerns.
"Obviously the devil's in the details," said Reuben Yap, a long-time player in the bitcoin space and project steward of Firo, a digital currency that enables untraceable transactions. "If bitcoin is going to be as volatile as it is, does it actually make sense to denominate things in BTC prices?"
Yap also questioned how El Salvador's central bank will ensure convertibility with USD, given bitcoin's massive price swings, which could make maintaining reserves complicated.
None of this guarantees, however, that bitcoin will achieve widespread use in the economy.
"What it directly affects is banks, which will likely have to transact in bitcoin," said Dan Roberts, editor-in-chief of Decrypt, a crypto news source. "They may have to accept deposits and hand out loans in bitcoin, and it will basically allow people in El Salvador to settle debts in bitcoin."
Bukele said in an extended tweet thread announcing the bill that merchants would be forced to accept bitcoin just like any other currency.
He also noted that the country had no immediate plans to hold bitcoin in its reserves, though it has put $150 million worth of bitcoin into a trust fund in its development bank to hedge against merchant risks.
Regardless of how much the government forces the adoption of bitcoin, Roberts added, it's use as a form of payment will be limited as long as it remains a highly volatile asset.
This basic reality, which is how many in the bitcoin community see the cryptocurrency even as they champion its adoption, has tempered excitement for the law since its announcement.
"Over the course of the few days since that news came out, there's been a little bit of a reassessment," Roberts said. "This is certainly big in El Salvador, but just how significant is this news for a bitcoin as a whole? Maybe not quite as significant as some believers thought at first."
'The Shot Heard 'Round the World'
Those who are more optimistic about El Salvador's new law tend to focus on its ability to help the country's unbanked population, as well as facilitate remittances, which are a significant source of income for the developing country.
Jack Mallers, CEO and founder of Strike, a bitcoin wallet company attached to the Lightning Network, which allows transactions to be done off the bitcoin blockchain, called Bukele's announcement a win for "human freedom" and "financial inclusivity."
“This is the shot heard 'round the world for Bitcoin," he said at the Bitcoin 2021 conference. "What's transformative here is that bitcoin is both the greatest reserve asset ever created and a superior monetary network."
Mallers and Strike are now working directly with the Salvadoran government to develop infrastructure that would extend access to the bitcoin network in a country where 70 percent of the population does not have a bank account or credit card, according to Bukele.
Adam Back of Blockstream, which is also on the Lightning Network, shared Mallers' enthusiasm.
"The message President Bukele is sending is that Bitcoin is hope," Back told Cheddar. "It shows that the Bitcoin standard that’s been discussed over the years can become reality."
Yet as usual with bitcoin, belief in its basic premise — that a decentralized currency should replace central bank-backed fiat — has a lot to do with how one thinks about further adoption.
As Mallers stated at the conference, "Holding bitcoin provides a way to protect developing economies from potential shocks of fiat currency inflation."
But can El Salvador — let alone its impoverished population — handle bitcoin's own price shocks? Many think this is unlikely as long as bitcoin continues to drastically fluctuate.
"It's pretty telling that even this big announcement couldn't boost the price of bitcoin," Roberts said. "In fact, bitcoin had been sliding for a few days and wouldn't budge and continued to slide in the immediate aftermath of this announcement. If you want to zoom out a little, it says a lot about where the crypto markets are at right now."
In the last month, the cryptocurrency has hit year-lows, with some analysts predicting it could drop as low as $20,000 in the near-future, coming down from an all-time high of around $65,000 per coin in April.
"We're having some bearish signals right now for bitcoin," he added.
