El Salvador becomes the first country to adopt bitcoin as a legal tender

El Salvador has become the first country to take bitcoin legal tender, which President Nayib Bukele hailed as a historic step toward financial inclusion and economic growth for the poor Central American nation.

The country’s legislature, which Bukele controls, passed the bill with 62 of 84 possible votes Wednesday. “History!The 39-year-old authoritarian president wrote on Twitter.

Bitcoin entrepreneurs have been enthusiastic about the decision in a country where 70 percent of Salvadorans do not have access to traditional financial services. Analysts have been cautious given the volatility of the cryptocurrency, and some have said it could even jeopardize a pending IMF program.

“This is just a bad idea… In fact, El Salvador will have TWO currency regimes operating in the country with the control of NONE of them,” said Bipan Rai, currency analyst at CIBC.

The law stated that “in order to promote the nation’s economic growth, it is necessary to authorize the circulation of a digital currency whose value meets only free market criteria, in order to increase national wealth for the benefit of the greatest number of people. inhabitants ».

Under the law, bitcoin can be used for purchases or tax payments, and bitcoin exchanges will not be subject to capital gains tax.

Some poor countries have fluctuated cryptocurrencies as a way to end dependence on the dollar, which El Salvador made legal tender in 2000.

“It has disadvantages,” said Hugo Renaudin, a crypto entrepreneur. “From a monetary perspective, it’s based on a different currency. . . and transaction costs are quite expensive for small purchases, so you won’t be able to buy a coffee in bitcoin – the costs will be higher than coffee – but you can buy an apartment ”.

Bitcoin was trading at $ 34,300, down 50 percent from its peak in April.

Salvadorans are very dependent remittances. Payments by family members in the United States account for one-fifth of gross national product, according to the World Bank. Bitcoin could make that process more expensive, said Juan Pablo Thieriot, chief executive of Uphold, a financial services platform that allows payments and exchanges in bitcoin or other currencies and instruments.

“Every country that supports bitcoin as a legal tender will have exchanges at every angle so you can go with bitcoin on your phone, scan a QR code and walk away with dollars,” he said.

“Merchants will do the same thing,” he added, noting that the fast-food chain Burger King has already offered bitcoin payments in Venezuela, whose bolivar currency has been devastated by the economic collapse.

Venezuela in 2018 unveiled plans for an oil-backed cryptocurrency, the petru, in an attempt to circumvent US sanctions, but it was a flop.

Siobhan Morden, head of Latin America’s fixed income strategy at Amherst Pierpont Securities, said he was in line with the “trend towards rumored and unexpected announcements that seem to contradict or at least call into question the plan by the economic team “. It could also jeopardize an IMF program that had been in place for more than a year, he added.

“President Bukele is non-compliant, with an active Twitter account and an antagonistic approach that implies high uncertainty about policy management,” he wrote in a note to clients. “Plans for bitcoin under one increasingly autocratic regime it will likely only address concerns about corruption, money laundering and the independence of regulatory agencies. ”

The government will establish a trust in the Development Bank of El Salvador to allow the automatic conversion of bitcoin into dollars. The law will enter into force 90 days after its publication in the Official Gazette.

Additional reports from Katie Martin in London

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