An article reviewing the controversial 2021 El Salvador Bitcoin Act

El Salvador’s embrace of Bitcoin has been one of the biggest stories in the crypto industry in 2021.

At Bitcoin Conference 2021: Miami in June, El Salvador President Nayib Bukele announced that Bitcoin will soon be accepted as legal tender. The news was met with applause from attendees in Miami, as well as high praise on Twitter from Bitcoin supporters such as Michael Thaler and Peter McCormack. However, this event that has sparked global heated debate has not been so smooth, and some international organizations and economists, including many people living in El Salvador, are not so enthusiastic.

After months of controversy, El Salvador’s Bitcoin law went into effect on September 7.

Bitcoin Lands in El Salvador
Since its inception more than a decade ago, Bitcoin has been widely regarded as a financial alternative to excessive government intervention and invasion of privacy by existing financial institutions.

But in El Salvador, bitcoin has undergone an unprecedented transformation — becoming the legal tender of a country.

"Next week, I will introduce a bill to Congress to make Bitcoin legal tender," President Buchler said in a video submission to Bitcoin Conference 2021.

wallet

Despite the unprecedented move, Bukler’s move actually borrows from the Bitcoin development “playbook,” designed as El Salvador’s nationwide hedge against inflation. El Salvador is one of the few countries that uses the U.S. dollar as legal tender, and like many Bitcoin proponents, Bukler laments the fact that the dollar is prone to inflation. Worse yet, if the US pursues inflationary economic policies, Salvadorans will have to watch their assets dwindle. Given that Bitcoin is considered to be a hedge against inflation, it became the new legal tender of El Salvador.

In addition, the livelihoods of many El Salvador residents are highly dependent on expat remittances, which account for 20% of the country's gross domestic product (GDP). More than 2 million Salvadorans live outside the country's territory, but they have maintained strong ties to their homeland, remitting more than $4 billion annually to the country.

Expats typically send money domestically through a bank or other financial services provider, but these intermediaries can drive up the cost of sending money across borders. For example, if someone sends $1,000 from the U.S. back to El Salvador, even under the guise of a “zero fee” exchange rate, the customer may actually face charges on both sides of the bank.

One of the advantages of Bitcoin or any cryptocurrency is that it does not rely on any intermediaries. Therefore, Bitcoin may be more attractive to the poorer country of El Salvador and to individuals who wish to avoid such fees.

Encryption technology can promote financial inclusion at scale has also been demonstrated in El Salvador. Fewer than 30 percent of El Salvadorans have a bank account, but in the weeks after the Bitcoin Act went into effect and the Chivo wallet was launched, more people had Bitcoin wallets than bank accounts.

Strike, one of the world's leading bitcoin wallets and one of the earliest developers of the Lightning Network, applauded El Salvador's move, with CEO Jack Mallers saying on the same day Buchler made the announcement: "Today, the world is Get better, humanity has made leaps in freedom, financial inclusion, and more.”

attract global attention
When Buchler first announced that he was going to support Bitcoin, he really only got the buzz among passionate Bitcoin supporters in the crypto community. However, other organizations are less enthusiastic about the economics of Bitcoin as fiat currency.

In June, the International Monetary Fund said El Salvador’s decision to adopt bitcoin as legal tender raised several “macroeconomic, financial and legal issues that require very careful analysis.”

That same month, the World Bank shouted that it would not help El Salvador establish bitcoin as legal tender, refusing to donate and provide technical assistance to the country due to concerns about the cryptocurrency’s lack of transparency and well-documented environmental damage.

Investment bank JPMorgan believes the move isn't cause for celebration: "It's clearly significant for the country, but it's hard to see any tangible economic benefit associated with the adoption of bitcoin as a second form of fiat currency."

The widely used Strike wallet, which was launched in El Salvador in March, is also controversial. Money transmitter is a term with special legal meaning. In the United States, money transmitter services are required to be licensed in each state in which they operate. However, Zap, the parent company behind the wallet, failed to do so. According to the investigation, Zap did not have a license to operate in most states in the United States, and only obtained a currency transfer license in 17 states, which means that many encrypted transfers sent to El Salvador using Strike may be illegal.

Just last month, the Bank of England expressed concern about El Salvador. Bank of England Governor Andrew Bailey said that what worries him “most concerned” about El Salvador’s embrace of bitcoin is “whether the country’s citizens understand the nature and volatility of bitcoin.”

However, based on the performance of the past seven months, the residents of El Salvador do understand Bitcoin but do not want to impose it on them as legal tender.