Has El Salvador’s Bitcoin Legal Tender Stance Impacted the Crypto Adoption?

El Salvador is a country in Central America that borders the Pacific Ocean to the north. It also borders Guatemala to the southeast and Honduras to the southwest. It has recently adopted Bitcoin as its legal tender. BTC is now a lawful means of payment in the country. For some time now, many countries have turned their attention to the “future of finance.” This act has triggered numerous reactions worldwide. Also, many countries take sides between backing and condemning crypto adoption.  

Why did Salvador make Bitcoin its legal tender?

On 9th June 2021, El Salvador passed a unique bill. 62 out of 84 congress members voted in favor of making Bitcoin a legal tender in the country. President Nayib Bukele backed this motion. He saw the adoption of BTC would provide his citizens with investment incentives, financial inclusion, and jobs. The Salvadoran government will issue permanent residence to global citizens who will invest their BTC in the country.As an incentive for signing up for government-backed wallets, Salvador will give its citizens $30. About 70% of Salvadorians do not have access to banking services. Therefore the use of BTC as a legal tender helps expand financial inclusion. However, the impact of p2p transactions on their economy is not clear.

Implications of Legalizing Bitcoin to Salvador’s economy 

In June 2021, IMF Director Gerry Rice stated that Salvador’s move posed untold financial, macroeconomic, and legal issues. These issues would require careful analysis. The IMF and Salvador are holding talks to iron them out. Among the concerns that the country will have to deal with are: 

Effect on International Trade

The US is Salvador’s largest trading partner, with 2019 exports into Salvador reaching $3.4B while the exports to the US were $2.5 B. Since Salvador ditched its legal tender in 2001 and adopted the US dollar, their business relations have flourished. Using different currencies again could affect this trade relation since their exchange rates are different.

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The Worldwide Crypto Adoption Regulations Review

Since some countries like China and Russia have warned against involvement in cryptos on their land. Relations between them and Salvador will be affected because these countries will tend to distance themselves from cryptos.

Operations of a Central Bank Without Monetary Control

Bitcoin source code allows it to have only 21 million tokens. It remains a mystery how the central bank of Salvador will function without total control over their legal tender.

Effects of Unstable Inflation and Exchange Rates on the Economy

Bitcoin is highly volatile. This feature will affect Salvador. The gas fees in the transaction of Bitcoin keep changing. As such, the transaction costs of the currency in the country will be irregular.

Effects of Legalizing Bitcoin on Crypto Adoption

Many countries are debating whether cryptocurrencies are the future of their financial systems. Most are treading carefully on that. The reason is despite their advantages, adopting cryptos raises several concerns. A day after the approval of BTC as legal tender in Salvador, its market values plummeted. Such effects are the reason why the governments of the world are not adopting cryptos.Many countries are considering the best ways to regulate crypto transactions before adopting them. Once crypto adoption begins, life will never be the same again. The following are some of the countries that have reacted to Crypto adoption lately.On 14th September 2021, US senators summoned SEC chair, Gary Gensler, to question him about the delays in SEC joining the campaign for regulation of cryptos. The Senate Banking committee invited him for a discussion to ensure that some financial rules are intact since cryptocurrencies may encourage criminal activities. However, he assured the Senate that his top regulator is working around the clock to make rules that will govern the highly volatile crypto markets. It is not the first time that the US government has tried to regulate cryptos.Since 2017, China has stood firm with its decision to oppose the use of cryptocurrencies among its citizens. The People’s Bank of China (PBOC) warned other banks against facilitating cryptocurrency-related transactions. The Chinese leaders noted that the Crypto era challenges the economic and financial order of the country.   The United Kingdom has set aside rules to follow when transacting using cryptocurrency. The UK never backed nor went against the use of cryptocurrencies. But it rolled out some rules in a bid to control crypto transactions. Japan has also reacted to adopting cryptocurrencies. It has set up a task force to oversee the analysis of crypto gains to develop a CBDC.

Which Countries have allowed the use of cryptos after Salvador’s Bitcoin Stance?

After Salvador’s BTC push, some countries have started discussions on whether to legalize the use of cryptos in their areas of jurisdiction. These countries include:

• According to CNBC, Ukraine has also legalized Bitcoin. As per the report, the Parliament voted in favor of a bill from 2020.
• On 17th June, Paraguayan politician, Carlos Rejala, tweeted in support of Bitcoin. He spoke about proposing a motion asking the Paraguayan lawmakers to regulate BTC.
• Some Mexican lawmakers have also thrown their support behind Bitcoin and other cryptos. Eduardo Murat said that he was planning to promote and propose a legal framework for the operation of cryptos in Mexico.

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To sum up all of the above, we can see that cryptocurrencies have a promising future. World leaders have seen the potential in digital currency and have decided to adopt it progressively. The governments have started by pushing for the regulation of cryptocurrencies before adopting them as legal tenders.After the regulation and study of cryptocurrencies end, the next step will be the official adoption and incorporation of cryptos into financial systems. El Salvador’s Bitcoin stance is just the beginning of the era of the adoption of cryptocurrencies. It will serve as a case study for others seeking to adopt digital currencies as their legal tender.