El Salvador
In the early months of 2021, rumours of a bold and ambitious scheme started to circulate—a scheme that had the potential to reshape the financial landscape of an entire nation. This endeavour was a collaboration between a forward-thinking tech CEO, Jack Mallers , of Strike, and an innovative president, Nayib Bukele. Its ultimate outcome? El Salvador’s embrace of Bitcoin as its official legal tender.
In a world where currencies have been defined by governments for centuries, this decision was nothing short of revolutionary. El Salvador is a small developing nation with a population of just over 6.3 million people. It had adopted the US dollar as its official currency in January 2001.
On June 9th, 2021, the Salvadoran parliament approved “The Bitcoin Law,” garnering significant attention for this Central American nation. El Salvador officially implemented Bitcoin as legal tender on September 7, 2021, becoming the world’s first country to do so. President Nayib Bukele argued that this move would enhance financial inclusion, reduce remittance costs, and attract foreign investments.
Why is Legal Tender important?
Legal tender is money that is recognised by law as a valid form of payment for debts. It is the only form of money that can be legally used to pay for goods and services. In most countries, the legal tender currency is issued by the government.
Legal Tender Currency also:
- Facilitates trade and commerce: Legal tender currency makes it easier for people to exchange goods and services because they know that they can use it to pay for them. This is important for the economy because it allows people to buy and sell goods and services without having to worry about finding someone who is willing to accept their payment.
- Stabilises the economy: Legal tender currency helps to stabilize the economy by making it more difficult for people to hoard money. When people hoard money, they are taking it out of circulation, which can lead to inflation. Legal tender currency makes it more difficult for people to hoard money because they know that they can use it to buy goods and services.
- Provides a store of value: Legal tender currency is not subject to the same fluctuations as other assets, such as stocks or bonds. This makes it a more reliable way to store wealth. When people store their wealth in legal tender currency, they know that it will not lose its value as quickly as other assets.
- Promotes trust and confidence in the financial system: When people know that legal tender currency is accepted everywhere, they are more likely to use it and trust the financial system. This is important for the economy because it allows people to use the financial system to conduct their transactions.
Why El Salvador Embraced Bitcoin as Legal Tender:
- Financial inclusion: El Salvador has a high rate of financial exclusion, with about 70% of the population lacking access to a bank account. Bitcoin could help to increase financial inclusion by providing a way for people to store and transfer money without the need for a bank. This is especially important in rural areas, where banks are often not available.
- Remittances: El Salvador receives billions of dollars in remittances each year from Salvadorans living abroad. The cost of remittances is high, and Bitcoin could help to reduce these costs. The average remittance fee in El Salvador is 7%, which means that Salvadorans who receive remittances lose a significant amount of money each year. Bitcoin could help to reduce these fees by making it cheaper and faster to send money internationally.
- Foreign investment: Bitcoin could attract foreign investment to El Salvador by making it easier for businesses to operate in the country. Bitcoin is a global currency, and it could make it easier for businesses to attract customers and investors from other countries.
El Salvador progress:
According to government statistics. El Salvador experienced an 82.8% increase in tourism in 2022. Making it one of the countries with the highest tourism recovery rates in the region.
In May 2023, El Salvador cut all taxes on technology innovations and established Bitcoin Office. This move fulfilled Bukele’s promise of eliminating all income, property, and capital gains taxes on tech innovations. Without taxes and with the introduction of Volcano Energy bonds, more and more startups are moving to El Salvador.
Bitcoin mining offers nations a way to monetise any stranded or wasted energy. Stranded energy refers to energy sources that are located in remote areas or are generated intermittently but cannot be efficiently transported or stored. Bitcoin mining can monetize stranded energy by utilizing excess or otherwise wasted energy for mining operations. Miners can set up their operations near these energy sources, converting excess electricity into valuable bitcoins. Monetizing stranded energy sources through Bitcoin mining can provide economic benefits to regions with energy surpluses. On 5th June 2023 Volcano Energy released the following statement:
“El Salvador’s rapid progress towards economic freedom and self-reliance is gaining momentum as we harness our abundant and sustainable natural resources to create ‘Volcano Energy.’ Our primary goal is to position El Salvador as a prominent global player in the Bitcoin mining industry, while simultaneously promoting energy competitiveness, diversification, and geographic expansion for the Bitcoin network, as part of our unwavering commitment to establishing a global Bitcoin standard. With a focus on a debt-free approach, we are constructing a pathway to our geothermal future within the volcanic region, integrating solar and wind projects.”
As of August 23, El Salvador’s bond performance has yielded impressive returns exceeding 70%, as reported by Bloomberg. These eye-popping returns – the best among dollar bonds from emerging markets this year – are attracting investors who were once cautious or avoiding the securities altogether. President Nayib Bukele attributes this remarkable performance to his dual strategy: the utilization of Bitcoin as an official legal currency and El Salvador’s ongoing investments in this cryptocurrency as a means of preserving value.
Education has sky rocketed. 250,000+ Salvadorians have been awarded Bitcoin diplomas. My first Bitcoin and other NGOs continue to provide free education on Bitcoin. They are supported by the Human Rights Foundation and online donations.
Santander Study
Santander US Capital Markets has released a fresh study on 27th September 2023 concerning El Salvador . As disclosed by President Nayib Bukele of El Salvador, the surge in tourism within the nation is attributed to two main factors: the elevated security conditions and the incorporation of Bitcoin as an official legal currency in 2021.
In addition to the tourism surge, another sign of El Salvador’s improved societal conditions is the heightened interest among the Salvadoran diaspora to come back to their homeland. Santander referred to this phenomenon as “reverse emigration” and noted its potential influence on Foreign Direct Investment.
A survey conducted in 2022 by the International Organization for Migration revealed that 60.2% of Salvadorans have expressed an inclination to return to El Salvador at some point, with 18.6% of the population actively planning to make the move.
Northern Ireland
During my research on El Salvador, I found a similar situation in Northern Ireland, as in Scotland, where there is no designated legal tender currency. Instead, it employs the pound sterling (£) as its official currency but issues its own banknotes, technically classified as promissory notes rather than legal tender. While these notes are widely accepted in Northern Ireland, they may not be as readily embraced in other parts of the United Kingdom.
The Bank of England provides insight, stating that the acceptability of Scottish or Northern Ireland notes as a means of payment primarily depends on the agreement between the parties involved. Issuing banks must maintain assets in a Bank of England account to support banknote production. These banknotes are considered legal currency rather than legal tender and are categorised as promissory notes, signifying a written promise to pay a sum upon demand, backed by physical deposits at the central bank. Therefore, in the truest sense, a £5 note is only recognised as such when issued by the Bank of England.
There is no legal obligation to accept promissory notes.
Conclusion
El Salvador’s ground breaking decision to embrace Bitcoin as Legal Tender in 2021 has garnered global attention and produced positive outcomes, including increased tourism, the return of the Salvadoran diaspora, a surge in tech start-ups, and innovative energy solutions.
This bold experiment underscores the transformative potential of Bitcoin in national economies, challenging traditional monetary systems and prompting profound questions about the future of finance. As the world watches El Salvador’s journey and assesses its impact, it becomes clear that Bitcoin is a catalyst for change in the financial landscape, reshaping our perceptions of money, trade, and economic progress.
While El Salvador pioneers this path, the question arises: will other nations follow suit? The answer remains uncertain, but the discussion has begun. In this evolving financial landscape, regions like Northern Ireland, which currently lack their own legal tender currency, should carefully consider the potential advantages of adoption. Failing to explore such options could result in missed opportunities for economic growth and stability, particularly in the context of emerging technologies and global financial trends. The adoption of Bitcoin as legal tender, though requiring thoughtful consideration, could prove to be a prudent and forward-thinking move for regions seeking to unlock their economic potential and embrace new financial possibilities.
