The crowd of 12,000 bitcoiners erupted in wild cheers as the president of El Salvador, Nayib Bukele, announced he will send a bill to Congress next week to declare bitcoin as legal tender.
Ones image of Steve Jobs smiling to a cheering crowd after the 1984 ad could easily come to mind as it felt like an historic moment.
But plenty also insta ridiculed it. All of El Salvador is worth less than half of doge’s market cap, was the most common dismissal.
Then people had to open a map to see where this country is, with the surrounding information revealing Bukele had just fired five Supreme Court judges and had sent the military into Congress.
On the other hand violent crime has dropped significantly there after he came to power and he won in a recently held election believed to be free and fair with 90% support, giving him 2/3rd of Congress.
A Tik Tok autocrat, one paper called him. Populist millennial president would of course go bitcoin, quipped one commentator. Hondura needs one like him, says another. They just bitcoining to hide corruption, shouts someone else.
Making it difficult to package this because it is a surprising move by a very unexpected country, but one way to package it is that bitcoin itself is a piece of code, so bitcoin itself has nothing to do with any of this.
Some bitcoiners, in particular the Lightning Network based Strike, operate in El Salvador and the president of El Salvador wants to make bitcoin legal tender.
Our support or lack of it for any of the above is fully irrelevant, so if it goes well we’ll be happy. If it doesn’t, they can blame their president.
Political neutrality in short, not necessarily out of desire, but because there’s no alternative as bitcoin is open to all by inherent design.
El Salvador has enjoyed peace singe 1992 and they can generally be described as a western allied country. There’s arguably no macro-geopolitics in this, with El Salvador adopting the dollar as legal tender in 2001. The Milken Institute says:
“This tiny Central American country suffered no pre-dollarization crisis. In fact, El Salvador managed to stop inflation almost entirely in the wake of its 1980-92 civil war, and it averaged a respectable 4.4 percent growth rate from 1993 to 2000.
But the government thought more was possible and decided that the elimination of currency risk by means of dollarization would step up foreign direct investment (FDI, for short). Indeed, in a moment of hubris, officials envisioned a scenario in which the shift to dollars would effectively integrate El Salvador with the U.S. economy.”
As they don’t have their own currency, this move to bitcoin can be without cost. It doesn’t affect their budget or their ability to manage or manipulate the economy, or much of anything at all really since they do not have their own money.
In addition to one foreign money, they’re planning to add the global money, bitcoin, because why not? It won’t hamper their ability to print their currency, or change interest rates to manipulate supply, because this is what can be called a monetarily neutral country.
If they were using their own currency, then such step might have been called reckless by some. Since they aren’t, in many ways nothing changes as they keep operating the same, just with the addition of the bitcoin option.
That’s where the fundamental structures are concerned. At a more surface level a legal tender status means bitcoin has to be accepted for payments of debt.
That’s a very specific and pretty narrow legal definition which means the grocery store or the supermarket does not have to accept it for payment. But the bank does legally have to accept it for re-payment of loans and the government has to accept it for taxes, fines or arguably even licenses.
That’s in theory. In practice in the United States both gold and silver are legal tender, yet it would probably take some effort to get IRS to accept that gold, although they may well just think it as a curious encounter.
The US however has had other laws that have made irrelevant that part of the constitution, with a legal battle in the late 1800s and early 1900s ending with the US president firing the Supreme Court to get the fiat dollar as the legal tender.
As this would be a new law in El Salvador, there would presumably be a transition period, after which bitcoin can be used to pay debts with the president saying they will also hold bitcoin as reserve.
People will be free to choose whether to pay with bitcoin or dollars, however, so realistically it may be only curious encounters that involve bitcoin because why would you get rid of that instead of devaluing dollar.
Making this arguably a symbolic gesture, the very attention grabbing equivalent of ‘we’re open for business’ and that’s kind of how Bukele frames it, stating:
“Bitcoin has a market cap of $680 billion dollars. If 1% of it is invested in El Salvador, that would increase our GDP by 25%.
On the other side, bitcoin will have 10 million potential new users and the fastest growing way to transfer 6 billion dollars a year in remittances.
Besides, a big chunk of those 6 billion dollars is lost to intermediaries. By using bitcoin, the amount received by more than a million low income families will increase in the equivalent of billions of dollars every year. This will improve lives and the future of millions.
Furthermore, 70% of El Salvador’s population doesn’t have a bank account and work in the informal economy.
Financial inclusion is not only a moral imperative, but also a way to grow the country’s economy, providing access to credit, savings, investment and secure transactions.
We hope that this decision will be just the beginning in providing a space where some of the leading innovators can reimagine the future of finance, potentially helping billions around the world.”
It’s a no-loss decision for the president and El Salvador because in many ways nothing quite has to change while some are offered the option to bitcoin their debts or taxes, which can potentially have some benefits.
On the other hand this no-loss decision can and arguably already has had gains, not least the fact now we know where is this country and that it even exists.
May this have ramifications for the entire world, however, in fundamentally changing the legal status of bitcoin globally?
Bitcoin Now Money?
Caitlin Long, who worked with Wyoming lawmakers to pass a number of very crypto friendly legislation, says:
“IF ElSalvador adopts legislation to make bitcoin legal tender, bitcoin likely gets status as ‘money’ so treated on par w/ foreign currency by banks and possibly gets ‘cash’ accounting treatment under USGAAP/IFRS (solves BTC adverse acctg).”
If humans were computer code then we could have done if/then, else we’ll probably assume they’ll just ignore it.
It does however provide some leverage if bitcoiners wanted to re-fight classification battles, but the argument will probably just slightly change to bitcoin is not a foreign currency because no country has declared it as legal tender… except El Salvador but they don’t even issue their own currency so it doesn’t count.
If bitcoin was used in El Salvador as the sole legal tender and all payments were in bitcoin with the law then enforcing its acceptance, then you could have the argument that it’s a foreign currency.
But bitcoin isn’t a foreign currency really arguably even in that situation, it’s a global internet money or currency. The law just doesn’t recognize it because it didn’t exist when those laws were made, so we got a bunch of different agencies making a pastiche of classifications that ended up with bitcoin being everything depending on the circumstances, except a security.
In that sort of situation you ignore the law because it isn’t a real law where the circumstances are such that it is self evident the law is silly.
One such circumstance is if we presume bitcoin was widely used on the internet or other places as a currency, while IRS insists it has to be taxed as investment.
In such case presumably there would be legal and political battles that eventually update the law for bitcoin to be treated as currency when used as currency and as an investment when used as investment.
That’s in fact how some jurisdictions have classified it, with the wider point being the law is what the reasonable man thinks is the law or should be the law, rather than word games or some technical gotcha.
So it is probable this won’t change anything globally except maybe at the very edges if the agencies were willing to accept such change which they probably would really where it is used as currency.
But the better battle there is to get tax exemptions for small amounts like $2,000 as some Congressmen have suggested in some bills which are gathering dust.
Symbolically however this is a leveling up as the status of legal tender in one country is quiet an achievement for this space now a decade on and a testament to its success and potentially its inevitable global adoption either as currency or as investment, including for government reserves as well as corporate reserves.