El Salvador has become the first country to adopt bitcoin as legal tender, CNBC reported. Lawmakers in El Salvador’s Congress voted by a “supermajority” in favor of the Bitcoin Law. It got 62 out of 84 of the legislature’s vote.
As you might have expected, the price of bitcoin went up by 5% to $34,239.17 shortly after the results of the vote was known. This is a good example of something else CNBC reported:
Bitcoin is known for wild price swings that have prompted critics to suggest it is not suitable as an effective currency. It is still unclear how El Salvador will ultimately roll out bitcoin as legal tender.
As a result of the Bitcoin Law, prices in El Salvador can now be shown in bitcoin, tax contributions can be paid with digital currency, and exchanges in bitcoin will not be subject to capital gains tax. According to the law, the exchange rate with the U.S. dollar “will be freely established by the market.” Currently, El Salvador’s official currency is the U.S. dollar.
CNBC reported that, according to the Bitcoin Law, approximately 70% of El Salvador does not have access to traditional financial services. The use of bitcoin is seen as away to increase financial inclusion.
Reuters reported that President Nayub Bukele has touted the use of bitcoin for its potential to help Salvadorians living abroad to send remittances back home, while saying the U.S. dollar will also continue as legal tender.
The use of bitcoin will be optional – not required. El Salvador will begin using bitcoin as legal tender in 90 days, with the bitcoin-dollar exchange rate set by the market.
It seems to me that the use of bitcoin as one of the official currencies of an entire nation could be risky. Bitcoin has a tendency to plunge based on something random, such as a questionable tweet from Elon Musk. What happens if a Salvadorian living abroad sends bitcoin to a relative in El Salvador – and the price of the currency significantly drops on its way over? That’s something the Salvadorian government will have to figure out.