by Peter St. Onge, Mises Institute:
On Saturday, El Salvador’s president [Nayib Bukele] shook the Bitcoin world by announcing a plan to make Bitcoin legal tender in his country. Details will emerge over time, but even this early it looks like a very big deal.
So I wanted to get some quick thoughts on paper.
First off, will it happen? Lots of bills are introduced about Bitcoin but few become law. In this case, however, President Bukele sports a 92% approval rating and has a strong majority in the Salvadoran parliament. He’s a right-leaning populist, so he has many enemies in media and abroad, but he seems very secure at home.
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So, yes, it’s very likely to become law. We don’t yet know what pressure outside countries, especially the US, will apply—more on that below. But, for now, it looks very much real.
Okay, but is it a big deal? Critics are already laughing off El Salvador as a small and poor country. Of course, Google’s first 10,000 users looked silly compared to Yahoo’s millions. All revolutions start small.
For this revolution, there are two big implications for Bitcoin. First, even if just one country uses Bitcoin as legal tender, it could fundamentally change the regulatory and accounting landscapes worldwide that today stand in the way of much wider Bitcoin adoption.
Second, if Bitcoinization is popular among the Salvadoran people, it will likely spread to other countries in a long-anticipated “domino effect.” This could rapidly raise Bitcoin’s prospects of replacing fiat currency.
What’s El Salvador doing that’s new here? In 2016 Japan made a series of reforms that were widely misreported by journalists as making Bitcoin “legal tender,” but that actually made Bitcoin a “legally acceptable means of payment.” This distinction is very important and is the main way government monies handicap competitors.
To illustrate, if you lend somebody a Bitcoin in the US and they agree to repay you a Bitcoin, under the “legal tender” regime they can change their mind anytime and pay you in USD instead. So it’s long been “legally acceptable” in most countries to have contracts in Bitcoin (ask Russell Okung). But, legally, either party could insist on USD settlement.
If you’re American, you’ll recognize this dictate from the phrase “this note is legal tender for all debts, public and private,” inscribed on all US currency. And it’s the key mechanism that forces people to use government money under certain circumstances like the payment of debts. Meaning that if a competing media, like Bitcoin, can also stand as a legal tender, then now you go from monopoly to competitive currencies—the ultimate cage fight on equal footing.
So, yes, El Salvador is breaking fresh ground. It’s a true legal tender law, and given El Salvador is dollarized and doesn’t even have a national currency, the country is more likely to treat Bitcoin on an equal regulatory footing as its existing legal tender, the US dollar. For once, Bitcoin may get a level playing field.
What will Bitcoinization mean for average Salvadorans?
The country today is, indeed, poor, and has an underdeveloped financial system, with 70% of the population unbanked. Moreover, the Salvadoran economy is dominated by migrant remittances, which make up fully 22% of El Salvador’s GDP—about the same as oil’s contribution to Saudi Arabia’s national income.
These factors—unbanked population, remittances, and dollarization—combine to make El Salvador a perfect case study for Bitcoinization. After all, international remittances are one of the clearest use cases for Bitcoin; today, these remittances cost over 6% in fees—closer to 9% in sub-Saharan Africa—but can reach “upwards of 20%” for smaller amounts.
Indeed, President Bukele emphasized remittance fees in his legal tender announcement, noting that “[b]y using Bitcoin, the amount received by more than a million low-income families will increase in the equivalent of billions of dollars every year.”
So it’s a smart move. Next up, how will it affect regular Salvadorans? A key here is El Salvador’s close partnership, now deepened, with payments firm Zap and their Strike app. Strike works like Venmo or PayPal but, instead of holding US dollars on your behalf, Strike holds Bitcoins. So the process is as easy as using Venmo or Apple Pay, and Strike’s fees are fractions of a penny—far lower than a credit or debit card might charge.
As important as payments are for regular Salvadorans, the bigger impact from changing a nation’s money is impact on savings. Given El Salvador has lacked a national currency for 20 years, all domestic savings are in foreign currencies, particularly in the US dollar that is, after all, El Salvador’s single existing legal tender.
Will all those dollar holders swap for Bitcoin if the legal tender “playing field” is leveled?
I would guess in the medium term, most Salvadorean savings do not swap for Bitcoin. For the paradoxical reason that, because Bitcoin is a superior store of value to the US dollar, it enjoys enormous speculative interest that remains vulnerable to noise, whether from regulatory threats or unstable billionaires.
In practice, Salvadorans will probably mentally break their savings into medium-term savings and long-term savings. In other words, the money you’ll need in the next 2 or 5 years vs. the money you’re setting aside for a decade or longer—for retirement, or for your kids.