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El Salvador became the first country in the world to embrace bitcoin as legal tender after Congress adopted a proposal by President Nayib Bukele, who also aims to power the cryptocurrency's data mining with electricity from the Central American nation's volcanoes.
Despite concerns about the potential impact on El Salvador's agreement with the International Monetary Fund (IMF), lawmakers gave the green light after midnight Tuesday to adopt the law and use bitcoin with 62 of 84 available votes.
Bukele has praised the usage of Bitcoin for its ability to allow Salvadorans living abroad send remittances while still ensuring that the US dollar remains legal cash.
The president stated that he will meet with the IMF on Thursday to discuss this law and other problems, and that he has informed the international body that the adoption of cryptocurrencies will not impact the macroeconomic environment.
The accepted rule states that all prices may be expressed in bitcoin and all tax contributions may be paid in cryptocurrency, but that the dollar will be used as the reference currency for accounting reasons.
"The #LeyBitcoin is ambitious, but simple; it is also carefully designed so that it has zero risk (...) The Government will guarantee the precise value in dollars at the time of each transaction", Bukele stated on Twitter on Tuesday night.
On Wednesday, the president said that he had directed the national geothermal power provider LaGeo to make its facilities available for bitcoin mining utilizing sustainable energy from the country's volcanoes.
The president said on Wednesday that he has authorized the national geothermal power provider LaGeo to make its facilities available for bitcoin mining using sustainable energy from the country's volcanoes.
Bitcoin mining entails completing massive amounts of calculations in order to validate cryptocurrency transactions.
The usage of bitcoin as legal cash in El Salvador, where it now trades for $ 35,216.77 according to Refinitiv Eikon data, will take effect in 90 days, with the market setting the bitcoin-dollar exchange rate.
"The market will now focus on El Salvador's acceptance and if other countries will follow", said Richard Galvin, of the "crypto" firm Digital Asset Capital Management. "This might be a significant stimulus for bitcoin over the next two to three years".
Remittances
Emerging markets, where bank penetration is lower than in established economies and reliance on money transfers from overseas is higher, have been at the forefront of the cryptocurrency boom.
According to Bank of America (BofA), the nations with the biggest quantities of commerce and mining activity outside of the United States are all emerging countries, including China, Colombia, India, Kazakhstan, Kenya, Nigeria, South Africa, Ukraine, and Vietnam.
However, the usage of digital currencies might pose hazards to dollarized economies like El Salvador's in terms of macroeconomic and financial stability, as well as a probable spike in the cost of living, according to the bank.
"The primary reason of dollarization is high local inflation, which could exacerbate if digital currencies turn out to be inflationary", according to BofA's David Hauner.
According to World Bank data, remittances to El Salvador accounted for about $ 6 billion, or roughly one-fifth of GDP in 2019, one of the highest rates in the world. It was not immediately known what percentage of remittances sent to the country were in bitcoins.
In theory, cryptocurrency provides a quick and inexpensive means to transmit money across borders without relying on remittance providers. According to Bukele, around 70% of El Salvadorans do not have access to standard banking services.
Nonetheless, the use of cryptocurrencies for remittances is spotty around the world. Informal brokers are frequently used to convert local currency to and from bitcoin. Prices are volatile, and buying and selling is a complicated procedure that necessitates technical expertise.
