What Does El Salvador’s Legalization of Bitcoin Mean for the Cryptocurrency Sector?

A bill proposed by the president of El Salvador, Nayib Bukele, aims to make Bitcoin legal tender in the country. Even though this is a historic first, and marks a massive milestone for the cryptocurrency, it is not as monumental as the headlines make it appear, and there are ulterior motives behind the decision.

When it was announced on Saturday that the president of El Salvador proposed a bill to congress that would make Bitcoin legal tender, cryptocurrency fans around the world rejoiced. Bitcoin is finally being recognized by a world government as a true digital reserve currency, and some believe this is the beginning of a trend that will eventually lead all governments to recognizing Bitcoin. However, the reasoning behind Bitcoin’s adoption in the country has other motives besides the idea of promoting decentralization and money not controlled by any government.

First, it is important to understand what would happen in El Salvador if Bitcoin is declared legal tender. According to Investopedia, legal tender is “anything recognized by law as a means to settle a public or private debt or meet a financial obligation, including tax payments, contracts, and legal fines or damages.” This definition is far different than the general public’s perception. As a legal tender, merchants can still refuse to accept Bitcoin as payment for goods and services, but the government cannot. It may also mean that buying items using Bitcoin, which is widely regarded as a sale of property and subject to capital gains tax, will now be seen as a simple currency transaction, with no taxes levied.

Another barrier against Bitcoin’s adoption by merchants in the country is their other legal tender currency: the US dollar. Unlike Venezuela or Argentina, who adopt Bitcoin in order to avoid the volatility of their unstable government currencies, El Salvador primarily uses the dollar, which is the world reserve currency and as stable as one can get. Merchants will be more unlikely to adopt Bitcoin since it is unnecessary for day-to-day transactions. On the other hand, if Bitcoin was made legal tender in a country with an unstable currency, merchants and citizens would likely replace their government-issued currency with Bitcoin.

Regardless, the recognition of Bitcoin as legal tender will still be significant in terms of adoption, but far from the Bitcoin-centric economic system that some were thinking would occur in El Salvador.

Furthermore, President Bukele did not propose to legalize Bitcoin to further the ideology of decentralization, but for an ulterior motive. In January, it was revealed that El Salvador’s financial regulatory agency did not close the accounts of known money launderers and criminals. This and other corruption-related activities relating to high-ranking officials in the country has led the United States to consider imposing sanctions on the Central American country. They are also forming relationships with China and Russia, which America sees as a threat. Making Bitcoin a backup currency option means that any sanctions by the United States can be avoided easily, and also brings more recognition and popularity to the small country. It also makes Bukele more popular with the general public, as he is now seen as one of the figureheads of the cryptocurrency adoption movement.

An unintended side effect of El Salvador’s decision could be more regulation for Bitcoin in the future. If the United States decides to impose a sanction, and figures out that El Salvador is avoiding it through Bitcoin, they will do everything in their power to stop this from happening. Though unlikely, the United States could ban transacting Bitcoin privately, and only allow it through regulated exchanges. This may not be a death knell for Bitcoin, but would significantly hinder its adoption. As a nationless currency, it would be hard to argue that Bitcoin is being used to rival any government, but still could pose a threat to the United States’ implementation of sanctions and trade restrictions.

Even though all of the developments surrounding Bitcoin’s first recognition as a legal tender seem negative, there are many positives associated with the decision as well. The fact that Bitcoin is stable and secure enough for a world government, no matter how small, to choose it as a legal tender is massive. Other countries in Central America or around the world could follow suit, and then the momentum would continue to build and influence even more countries to make a similar decision. If Bitcoin became legal tender in even five percent of countries, there adoption would reach never-before-seen levels, and could mark a new age in the digital currency’s dominance.

By Lincoln Murr

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