The Salvadoran parliament passed a law in June that makes the oldest cryptocurrency a legal tender in this Central American state. Traders, restaurants, businesses, and even the state, are now forced to accept bitcoin as a means of payment. What are the effects expected by the government and, conversely, by its detractors? (Also Read: Bitcoin Price Forecast: Cataclysmic crash, the end of the Bull Run?)
It’s official this Tuesday, September 7, bitcoin, this cryptocurrency that is exchanged thanks to the decentralized blockchain protocol, becomes legal tender in El Salvador. A world first, in a country which, for 20 years, had made the dollar its reference currency, replacing its local currency (the colon). Announced in June by President Nayib Bukele, the decision arouses much criticism, in particular because of the particularly volatile price of this asset created in the aftermath of the 2008 financial crisis. The United States itself and the IMF (International Monetary Fund) warned this Central American country to democratize. (Must Read: Solana (SOL) Price Prediction: Why it could reach $ 350, thus demonstrating threefold growth)
But for this small state of 6.5 million inhabitants, the main objective is to facilitate money transfers between the Salvadoran diaspora and the local economic fabric. These movements, mainly from the United States, represented last year some six billion dollars (5 billion euros), the equivalent of about 23% of the gross domestic product of El Salvador, according to Reuters. Also, for the head of state, bitcoin will allow Salvadorans to save $ 400 million in bank fees when sending money by the diaspora.
“In El Salvador, inflation is moderate but the entire local banking system is based on the American banking system (…) What is interesting with bitcoin is:” I do not need to ask for permission “. It does not matter if the American system is complex ”, summarizes Nicolas Burtey, co-founder of Galoy Harmony during the French-speaking event“ Surfin Bitcoin 2021 ”which was held at the end of August in Biarritz. This Frenchman told of his experience of “Bitcoin Beach” or even of the local village El Zonte, which practices payments in bitcoin.
Also, in a country where more than two in three people do not have access to a bank account, according to the IMF, the challenge is to provide a framework, based on the technological consensus of Bitcoin, for exchanges.
The government has set up the infrastructure and the digital wallet called ” Chivo ” (“Super”, in colloquial language), accessible on mobile and online for all Salvadorans. To encourage everyday transactions, such as going to McDonald’s as one Internet user tells us on Twitter or paying taxes, the state is offering citizens $ 30 welcome. In addition, 200 ATMs for exchanging bitcoins are being installed in cities across the country.
Just walked into a McDonald's in San Salvador to see if I could pay for my breakfast with bitcoin, tbh fully expecting to be told no.— Aaron van Wirdum (@AaronvanW) September 7, 2021
But low and behold, they printed a ticket with QR that took me to a webpage with Lightning invoice, and now I'm enjoying my desayuno traditional! pic.twitter.com/NYCkMNbv7U
El Salvador also announced that it bought its first 200 bitcoins. A reserve of funds of 150 million dollars intended to guarantee the automatic convertibility of bitcoin into US dollars, while the price of bitcoin today reaches more than 50,000 dollars per unit.
A technological experiment to manage transfers and payments
Beyond the announcement, it is also a technological bet of a new “chain of blocks” (blockchain) which is being played in El Salvador. This is in fact the whole challenge of the ” Lightning Network ” protocol , that is to say a technological extension to which the Bitcoin protocol gave birth in 2015. In fact, Bitcoin – which is a chain of blocks of transactions – still presents limits in terms of trade scalability. “ (With Bitcoin) each block is added on average every 10 minutes by a mining process, for the computing power to validate and add new blocks,” recalls the Coinhouse site. And states: ” p our reach capacity of the Visa network, we need to block 13.4 GB, which is inconceivable in the current state of data storage technologies ” , specifies the site of the French cryptocurrency exchange platform.
Also, to manage a large quantity of transfers, El Salvador used Lightning Network technology to increase the number of transactions processed per second, instantly and without charge.
“bitcoin will have an impact on the prices of goods and services”
However, more than two-thirds of Salvadorans oppose the decision of the very popular President Bukele and say in two separate polls that they want to continue to use exclusively the US dollar.
“This bitcoin is a currency that does not exist, it is a currency that will not benefit the poorest, but the richest. Who, being poor, can invest when he barely has enough eat? ”, ignites José Santos Melara, a veteran of the civil war that tore El Salvador from 1980 to 1992, and who demonstrated against crypto-currency on Friday.
A week before the entry into force, several hundred people demonstrated in the capital to ask Parliament to renounce bitcoin.
Fearing money laundering by criminal networks, in particular drug trafficking networks, the United States called on El Salvador to ” protect itself from malicious actors” by using “regulated”, “transparent” and ” responsible” bitcoin .
This measure will have ” a negative impact” on the living conditions of Salvadorans due to the “high volatility of the exchange rate” of bitcoin, and will have an impact “on the prices of goods and services” , according to the economist of the University of Salvador Oscar Cabrera, also former president of the Central Bank of El Salvador. Bitcoin is the promise of a ” Titanic that no one rules “, he still worries. ” Bitcoin for them is hope (…) for people, it’s just magic “, assured Frenchman Nicolas Burtey at “Surfin Bitcoin 2021”.