It’s clear that adopting bitcoin as legal tender
can help El Salvador in many ways. But it can light the path for other
countries as well.
The green shadow cast by the U.S. dollar on
developing countries is being lifted. In El Salvador, it's now approaching high
noon.
Growing up in El Salvador during its civil war, I
never thought I would witness my home country filled with so much hope for the
future, let alone leading the way for others. The government's recently passed law making bitcoin legal tender is set to
take effect on September 7 — making it the first country in the world to do so.
The catalyst behind the bold move is El Salvadorian
President Nayib Bukele, a forward-thinking, entrepreneurial-spirited leader who
has created a template for other countries like Paraguay, Mexico, Panama and
Venezuela to follow. Bukele is the first president elected outside of the two
main parties since the civil war, the youngest president in history (at 37
years old) and he won on a platform of modernization. Bukele is keeping his
streak of firsts alive by illuminating how bitcoin can transform the country’s
financial system for the better and by showing a path for other countries with
emerging economies to get out from under the USD's shadow.
A Brief History Of Currency In El Salvador And Why Bitcoin Is Supreme
Today, El Salvador doesn't have a national
currency.
The colón, named after Christopher Columbus, was El
Salvador's currency but was abandoned in 2001 for the U.S. dollar. The purpose
was to curb inflation and increase trade with the U.S., a significant trading
partner. The tendency of developing countries to borrow in USD rather than
their own currencies is sometimes called "original sin," because it
reflects the fact that their currency is less accepted globally. Borrowing in
USD enables developing countries to pay for essential goods that would
otherwise be unaffordable. This concept, known as dollarization, happens when a
country's currency loses its usefulness as a medium of exchange, due to
hyperinflation or instability.
Cryptocurrency represents the modernization of
democracy and levels the playing field for the underserved. El Salvador's
adoption of bitcoin as legal tender gives hope to the people who need it most,
not just in El Salvador but also in the entire region.
By adopting bitcoin as legal tender, El Salvador is
betting that, in time, bitcoin will be:
- More
accepted globally
- A
deflationary medium of exchange
- A
launchpad for El Salvador's economic development
It has long been a challenge in El Salvador to
develop new growth sectors for a more diversified economy. Bitcoin is a progressive route to
accomplish that goal by providing a sanctuary state to attract talent and
increase GDP. For instance, as part of the law, President Bukele is incentivizing
foreigners to gain permanent residence in El Salvador if they invest 3 BTC into
the country.
Bitcoin Can Fix Remittances And Banking
Bitcoin will work better as a legal tender for
several reasons.
El Salvador depends heavily on remittances, which
make up 21% of its GDP, the second-highest of any country in the Western
Hemisphere. Bitcoin can facilitate remittances by working with or removing
intermediaries and reducing the costs of overseas payments. Many critics of
this approach reference high fees associated with the Bitcoin network that make
remittances impractical, but they're ignoring the Lightning Network.
For example, sending a $10 payment within the
Lightning Network would cost one satoshi (the
smallest unit of a bitcoin, equivalent to 100 millionth of a bitcoin) to
complete the transaction in one second. Other critics reference the difficulty
in sending and receiving bitcoin. But take it from me, I sent bitcoin to my mother
in El Salvador recently without a glitch. If my mother, who is in her 80s, can
do it, so can anyone.
In El Salvador, 70% of the
population is without bank accounts. The unbanked face tremendous
challenges in saving and wealth accumulation. They must also work in the
shadows because they are locked out of the main stream of the local economy,
often leading to exploitation. By adopting bitcoin, they are gaining access
within the local economy and beyond it, globally.
A New Era For Bitcoin Mining
It's no mystery that El Salvador is a developing
country in search of economic growth. In the past, El Salvador produced gold
and silver, but attempts to reopen the mining sector collapsed after the former
president, Antonio Saca, shut down the operations of Pacific Rim Mining Corporation in 2009.
With the emergence of the new "mining"
sector and the charge for the bitcoin mining community to institute more
renewable energy standards, President Bukele is looking into using geothermal energy from volcanoes.
This same entrepreneurial, fast-moving approach is
also exhibited in the United States from the likes of Francis Suarez, the mayor
of Miami, creating a sort of cryptocurrency hub. In fact, a growing number of
government leaders are using this method with the intention of attracting
entrepreneurs which, in so doing, boosts the economy.
Bitcoin’s Obstacles Around The Bend
As with any change in law, especially in adopting a
new tender, there will be challenges. Think of what it took for the U.S. dollar
to get to where it is today. It took six decades, war and controversial bait
and switch tactics. The adoption of bitcoin won't be flawless, but it will be
peaceful, transparent and immutable.
Bitcoin is still in its maturation phase and the
entire world is still trying to understand it, which takes time. Education is
paramount.
Because bitcoin is a digital currency, it requires
digital compatibility adjacent to it. As of 2017 (the most recent survey available), only 37.1% of El Salvador’s
population owned smartphones, underscoring one portion of the large technological
gap in need of a bridge.
Although El Salvador is taking a bold risk, its asymmetrical benefit of adopting bitcoin as legal tender can change the world for the better. One thing is certain: The world is watching El Salvador. How many times in your life has that been true?
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