El Salvador is the first country in the whole world to make Bitcoin a legal tender. And this means that you can use it in your daily life to get things from shops, dine in restaurants, and even while paying taxes! El Salvador announced Bitcoin as the legal tender in June 2021.
President Nayib Buckle said that the State took a historic step towards financial inclusion and economic growth. But how exactly will this affect the economy and finance of the country? Let’s try to understand in today’s article!
El Salvador is a small country in Central America. There was a time when this country was one of the most dangerous countries as the murder rate here was the highest in the world.
What Happened In Venezuela?
Venezuela tried making their cryptocurrency legal tender, but they failed. So, the El Salvador government decided to declare the most popular cryptocurrency ‘Bitcoin’ as the legal tender. The legal tender mentions that people can carry out any payment in return for goods or services with Bitcoin, and the service provider can not reject it. According to this tender, people can also complete tax payments to the government using Bitcoin.
How Will It Work?
Now all these were the theoretical part. How will it work in reality?
The country now has two legal tenders, the US dollar, and Bitcoin. The government has come with a simple solution for payments in terms of Bitcoin. They said that they will have the prices in US dollars, and the conversion rate between US dollar and Bitcoin at that time will be used to calculate the amount to be paid in Bitcoin.
For eg, if one kg tomato costs $3, then you will have to pay the $3 in Bitcoin.
While there is an exception in the law that if people do not have the technology to accept Bitcoins, there is no compulsion to accept. At the same time, the government will promote necessary training so people can carry out transactions in Bitcoin.
But what will happen when you pay someone in Bitcoin, and during the transaction, the price of Bitcoin starts fluctuating rapidly? By the time another person receives payment in Bitcoin, the price has changed significantly. To avoid such situations, the El Salvador government has created a trust of $150 million that will guarantee the convertibility of Bitcoin to dollars at the time of transaction.
Challenges and Criticism
- Several experts believe that most people in the country will not use Bitcoin in their day-to-day life. Why? Because if there is an expectation of a future increase in the price of Bitcoin, then people will not want to spend Bitcoin. People will want to store all the Bitcoin they have to get a higher return later.
- On the other hand, if there is an expectation that the price of Bitcoin will fall, then why will anyone will want to accept Bitcoin as a form of payment?
What The Country Aims To Achieve?
- President Nayib Buckle believes that this decision will lead to an increase in financial inclusion in the country and will generate more jobs.
- The government believes that this will increase their GDP as the step taken aims to attract foreigners to invest in their country.