Bitcoin and El Salvador: Building a Modern Financial Infrastructure

On 9 June, El Salvador became the very first country in the world to adopt the cryptocurrency bitcoin (BTC) as legal tender following congress approval of President Nayib Bukele’s financial proposal. El Salvador adopted the US dollar 20 years ago and currently does not actually have its own local currency.

El Salvador hopes bitcoin will be the answer to several deficiencies in its current banking infrastructure and cryptocurrency enthusiasts will hope that success in El Salvador will further promote institutional adoption.

What’s happening in El Salvador?

According to President Bukele, 70% of people in El Salvador can not access traditional financial services. Bank penetration is extremely low and the local population must rely on money transfers. Many people from El Salvador are still very much aware of the loss of purchasing power poor people had experienced when the country adopted the US dollar back in 2001.

The cryptocurrency will officially become legal tender in September and the bitcoin/USD rate will be set to the market. Currently, the El Salvador government, nor the Central Bank hold any bitcoin reserves. The bitcoin legislation will allow citizens to express merchant prices in BTC, pay their taxes in bitcoin, and perform day-to-day transactions using bitcoin. Upon its implementation, all businesses in El Salvador must accept bitcoin as payment for goods and services.

Building a modern financial infrastructure in El Salvador

The first obvious advantage to the legalisation of bitcoin in El Salvador is the ability for Salvadorians who live abroad, now have a beneficial means to send funds home to their families. El Salvador relies quite heavily on money sent back by citizens working abroad in foreign countries. In fact, $6 billion or a 5th of the country’s GDP in 2019 was made up of remittances from abroad. Bitcoin would make this process quicker and cheaper, while also removing foreign conversion fees imposed by brokers.

Bukele sees an economic boost by attracting bitcoin miners by building a bitcoin mining hub in El Salvador based upon the country’s unique geothermal potential. It remains to be seen how El Salvador could be the blueprint for other South American countries facing similar issues within their own banking infrastructure. Several countries in the region have hinted at following suit with bitcoin adoption.

The future of digital local currencies

While El Salvador has gone all in on bitcoin, it is not the first nation to explore a national digital currency. The USD Coin (USDC) is a stable coin that is pegged to the value of the US Dollar – granting users the same benefits for cheap and fast cross-border transactions but not subject to the wild volatility of cryptocurrencies.

In April, it was reported that the United Kingdom had launched a joint task force, consisting of the UK treasury and Bank of England, to explore the potential behind a central bank digital currency that would exist alongside cash and bank transfers to be used by individuals and businesses.

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