Today marks a landmark in history. For the first time, a sovereign nation, as recognised by the United Nations, will adopt a cryptocurrency as legal tender.
It is not the United States of America, or the People’s Republic of China, or even the United Kingdom of Great Britain and Northern Ireland that is leading the charge, however. Instead it’s a small Central American nation with a population around six million and a GDP of just $26bn.
Of the 200-odd nations in the world it ranks 149th on the rich list, with a GDP per head of less than $4,000. I’m talking, of course, about the Republic of El Salvador, where later today bitcoin will become legal tender.
Remember the date: 7 September, 2021.
The adoption of bitcoin is likely to be tricky – but it’s very bullish overall
“Legal tender” is one of those phrases that gets bandied about without people really knowing what it means. Moreover, there is quite a gulf between the official definition and what it actually means in practice.
The dictionary, in this case the Oxford English Dictionary, says legal tender means “coins or banknotes that must be accepted if offered in payment of a debt”.
In practice, however, you cannot force, say, a restaurant that only takes card payments to accept cash. Gold sovereigns are legal tender – but try spending them at Tesco.
In fact, I had one amusing email exchange with a gentleman who was on a mission to re-introduce silver by stealth into the British monetary system by demanding his local Tesco accept silver Britannias as payment for his groceries. He did the same when trying to pay for his petrol at a BP garage and ended up getting arrested.
So even though bitcoin becomes legal tender today in El Salvador, it doesn’t mean that every shop or merchant in El Salvador will now have to accept it as payment or face arrest. (For more on El Salvador’s existing monetary arrangements, you can read Saloni’s piece here.) In practice it just means that bitcoin will become a formally recognised part of the monetary system.
Debts owed to creditors can be settled in bitcoin; you will be able to pay your taxes in bitcoin. As legal tender, it also means – significantly, I’d say – that bitcoin gains will not be subject to capital gains tax.
President Nayib Bukele means business. El Salvador bought its first 200 bitcoins yesterday, he announced on Twitter. The state has spent some $200m on rolling out hundreds of bitcoin ATMs. Citizens who sign up for the state wallet – the Chivo (meaning “cool”) – will be given $30 of bitcoin as a freebie.
It’s going to be a huge technological leap and, no doubt, many will struggle with it at first. But people tend to be quick to learn when there is profit to be had. Even a fogey such as myself is able to do things on a computer that I could not have dreamt of a decade ago. I imagine you are the same.
Crypto adoption sits at around 5% in El Salvador – roughly the same as it is elsewhere in the region. This move will, of course, accelerate that. There is also the fact that many locals are still mistrustful about monetary change after the dollarisation of 20 years ago.
There were supposed to be 8.5 colones to a dollar, but a lot of rounding up resulted in near-instantaneous inflation of more than 20%. Something similar occurred on the continent when nations flipped to the euro, although not to the same extent.
The new tech is also likely to be buggy, and “nocoiner” critics will leap on every perceived failure to prove their point. But my view is that this is an extraordinarily bullish move both for bitcoin and for El Salvador.
The benefits of bitcoin-isation
First, there is financial inclusion. About 70% of Salvadorans still don’t have a bank account. I find that extraordinary in 2021, yet it is so. Financial exclusion is perhaps the most restrictive force on the global poor there is. It confines your ability to trade, exchange, borrow, invest and generally improve your lot to your immediate vicinity.
Salvadorans all have smartphones, however. At least those who want one do, even the poorest. There are more than ten million mobile phone subscriptions in a country of six million.
An internet connection is all you need to participate in the bureaucracy-free financial system that is bitcoin. It is permissionless; never mind credit scores, ID checks and physical facilities – have you got a smart phone? Download a wallet and off you go.
The international currency that is bitcoin will open up a plethora of opportunities that did not previously exist.
Remittances play a huge role in El Salvador’s economy. As much as 17% of GDP is sent back from those working abroad. Cross-border remittance is one of the areas in which crypto excels, and Salvadorans should save a fortune in both fees and time. Lower fees mean more money entering the country.
Workers can be paid and store wealth in a currency that is not subject to US monetary policy. Given bitcoin’s limited supply relative to US dollars, the purchasing power of their money will increase over time rather than fall. That is an extraordinarily powerful force.
The move has already brought the country a wave of positive publicity, putting a little-known nation on the international map. Even in these days of restricted movement, visitors, especially from the bitcoin community, are on the rise. Tourism accounts for 11% of GDP; that will go up. Residency will cost you just three bitcoins (circa $150,000) – an attractive proposal for many bitcoiners (especially given the capital gains point).
Investment from abroad will increase too – sound money boosts investment. And location doesn’t matter to crypto – it gravitates where legislation is favourable. The extraordinarily fast-growing and wealthy bitcoin tech sector will invest billions. In fact, it’s already started.
Moves are being made to develop the country’s enormous volcanic geo-thermal reserves as bitcoin miners come to the country to exploit this free and almost unlimited renewable energy resource. As bitcoin mining finds ways to turn those geo-thermal resources to electricity, how else will the country benefit from this newfound cheap power?
The move will develop the country’s digital economy, which is verging on the non-existent, reducing its dependence on the low-margin textiles industry which represents as much as 45% of exports, as well as coffee and sugar.
And if bitcoin goes on another of its runs – what’s that going to do for the national finances of El Salvador?
And it’s good news for bitcoin too
That’s all very well – but why is this move bullish for bitcoin?
Governments lack imagination; it is a rare leader who shows it. Most of the time they play it safe and copy each other – Covid showed that.
Bukele has shown imagination. He is taking the risks. If – when – it works for his country and El Salvador becomes the fastest-growing economy in Central America – do you think its neighbours won’t copy it? Panama is next in line.
Indeed, much of South and Central America cannot wait to rid itself of its dollar dependence (which leaves it at the mercy of US monetary policy decisions). Bitcoin is their escape.
This is the beginning of the next chapter of bitcoin’s extraordinary success story – adoption at the national level.
The success won’t happen overnight. Every failure will be jumped on by the nocoiner press. The World Bank, the International Monetary Fund and the financial establishment are going to hate it, because bitcoin obviates them.
But in time this move will give El Salvador and its people extraordinary economic freedom – the ability to spend and save in a money beyond government control.
¡Vamos El Salvador!
Until next time,
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.