On Wednesday, El Salvador’s president signed into law a proposal to adopt bitcoin as legal tender, making the Central American nation the first in the world to officially use the cryptocurrency.
The new law says that companies must accept bitcoin as a form of payment, and the government will allow people to pay taxes with it as well. The exchange rate with the dollar will be set by the market, and exchanges from dollars to bitcoin won’t be subject to capital gains tax. The law was passed by a supermajority vote of the legislature, with 62 of 84 deputies assenting.
President Nayib Bukele said the new law would make it easier for Salvadorans living abroad to send remittances back to friends and family in the country. Some $6 billion in remittances flowed into the Salvadoran economy last year, accounting for nearly a quarter of the country’s gross domestic product. Around 70 percent of Salvadorans lack access to traditional banking and other financial services within the country, the president said. The 39-year-old leader hopes that sending remittances will become cheaper, too. Last year, the average fee was 3 percent per transaction. Eliminating that fee would net Salvadorans an additional $180 million.
The country has used the US dollar as its primary currency since 2001, when the government was attempting to stabilize and shore up an economy left in shambles by a bloody 12-year civil war that ended in 1992. The government switched its accounting system to dollars and stopped printing and minting its old currency, colones, though it did not remove it as legal tender. People can still spend any colones in their possession at a rate fixed to the dollar.
El Salvador’s use of the dollar as its primary currency has meant that the country has minimal control over its monetary policy; for all intents and purposes, the US Federal Reserve exerts more power. As a result, efforts by the Salvadoran government to prop up the economy in a recession must be through fiscal interventions, which require a supermajority in the legislature. Adopting bitcoin won’t change this situation, of course, since the supply of the cryptocurrency is limited by mining rates and is ultimately capped at 21 million bitcoins.
Bukele is hoping that by jumping on the bitcoin bandwagon, the country will attract investors. “#Bitcoin has a market cap of $680 billion dollars,” he wrote in a tweet. “If 1% of it is invested in El Salvador, that would increase our GDP by 25%.” That assumption, of course, is highly dependent on bitcoin’s market cap, which has fluctuated significantly over the last year as the cryptocurrency’s price has swung wildly.
Overnight, bitcoin prices are up around 7 percent, though they’re still off some 50 percent from their mid-April peak, when Tesla CEO Elon Musk criticized the cryptocurrency’s energy use and reversed course on accepting bitcoin for Tesla purchases. Musk’s decision was prompted in part by Ars’ coverage of a fossil fuel power plant in upstate New York that had been purchased by a private equity firm and tasked with mining bitcoin. Bitcoin’s energy use has skyrocketed in recent months and uses as much energy today on an annualized basis as the United Arab Emirates, or about 127 TWh per year. A single bitcoin transaction requires nearly 1,600 kWh to complete and produces an estimated 746 kg of carbon dioxide.
That high energy use is baked into bitcoin’s design, which uses proof of work—computations of cryptographic hashes—to verify records and transactions on the blockchain. Other cryptocurrencies are either based on or planning to switch to other ways of maintaining the blockchain, including proof of stake, which requires users who validate the chain to hold a certain amount of the cryptocurrency, lowering the amount of energy use.