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El Salvador and Bitcoin: World’s First Country to make Bitcoin Legal Tender

Why it matters to you:
The experience of El Salvador as the first state to adopt crypto as legal tender is crucial for the future adoption rush.
Why did El Salvador adopt Bitcoin as legal tender?What’s next in El Salvador’s Cryptoplan?Will El Salvador’s Cryptoplan work?

In September 2021, El Salvador officially adopted Bitcoin as legal tender. The entire population of El Salvador, a small Latin American country, can now buy and sell goods and services using Bitcoin.

El Salvador’s other legal tender is the US Dollar. Although Bitcoin isn’t intended to replace the Dollar, this should solve several tricky economic problems in the country. 

Why did El Salvador adopt Bitcoin as legal tender? 

El Salvador is a small country, with a population of 6.8 million people. Economically, it is proportionately small, with a GDP of $53.67 billion, working out at $3,400 per capita. 

On the Human Development Index, El Salvador ranks 124 out of 189 countries, with high levels of crime, gang-related violence, and poverty. Despite these issues, it scores well for income equality, as the second-highest in Latin America. 

Poverty and a struggling economy are  some of the main reasons El Salvador made Bitcoin legal tender. As is often the case with similar economies, citizens working abroad send money home. Repatriations account for 20% of El Salvador’s GDP, with a large portion of that lost to high transaction fees. Too many of the country's citizens don’t have bank accounts either. 

This means El Salvador is essentially an unbanked population relying on money from abroad. It’s also a notoriously difficult country to do business in, with high levels of corruption. All of this negatively impacts El Salvador’s economy. 

The government

issued every citizen with $30 worth of Bitcoin

A solution had to be found. El Salvador’s iconic President Nayib Bukele proposed a "cryptoplan”, starting with making Bitcoin legal tender. The government issued every citizen with $30 worth of Bitcoin and legislated  that businesses have to accept it as payment for goods and services. Even if they convert it to US Dollars immediately after, it has to be accepted at the point-of-sale (POS). 

What’s next in El Salvador’s Cryptoplan? 

President Nayib Bukele is fairly active on Twitter and in the crypto-community. He even announced on Twitter the moment El Salvador bought enough Bitcoin to distribute $30 to every adult citizen. Bukele was smart and bought almost at the bottom of the dip. Later El Salvador bought Bitcoin three times more: 420 BTC on October 28, 100 BTC on November 27, and 22 BTC on December 22, 2021.

But this cryptoplan doesn’t end with Bitcoin becoming legal tender in El Salvador. 

At a Bitcoin Conference in November, Bukele announced a “Bitcoin City”, which will be paid for with a sovereign Bitcoin Bond, valued at $1 billion. Bitcoin City is planned to be constructed close to the country's border with Honduras and Nicaragua. Situated near the Conchagua volcano, which will generate power for the city, it will include residential and commercial areas and an airport. 

Aaron Koenig, a crypto enthusiast and digital entrepreneur who attended the conference, describes the Bitcoin Bond as “the hottest investment in the cryptosphere at present”, according to DW

El Salvador plans to sell this as a 10-year US-dollar-denominated bond with a 6.5% coupon. 

Half of the income from the bond sale will be put into Bitcoin, which the country will hold for five years. This is with the hopeful assumption that the value of Bitcoin will increase during those five years. The other half of the income generated would be used to fund energy and crypto-mining infrastructure construction projects. 

El Salvador has already decided how the tokenized bond will be sold, in partnership with Blockstream, a digital assets infrastructure company in Canada. 

Blockstream Chief Strategy Officer, Samson Mow told Bloomberg that investors can expect more than the 6.5% coupon payments. He said, “For the first five years, there'll be a 6.5% coupon, but then it accelerates to what I call a Bitcoin dividend. This is a special dividend from basically the Bitcoin being sold off. The Salvadoran government will share that with the bondholder”, as quoted in a DW article

Dividend payments will be in Dollars, with the option of being paid in Tether, a stablecoin. Samson Mow expects the bond issuance to be massively oversubscribed. 

Will El Salvador’s Cryptoplan work? 

The construction of Bitcoin City is estimated to cost $17 billion—an unheard-of sum, in a country with a GDP of around $53.67 billion. Unless El Salvador issues more bonds, Bitcoin City near a volcano isn’t going to be built anytime soon. 

Interestingly, when El Salvador made Bitcoin legal tender, the International Monetary Fund (IMF) decided not to grant the country $1 billion in new loans. 

German economist Christian Ambrosius describes Bukele's plans as “highly dangerous”, in an interview with DW. Ambrosius bases this on an IMF report, skeptical about the long-term stability of El Salvador’s economy, partly because Bitcoin is now legal tender. That, and several attempts by President Bukele to undermine the democratic rule of law and societal norms in the country. 

Despite these concerns, El Salvador will likely generate $1 billion or more from the bond sale. Bitcoin could also solve several of the country's economic problems, effectively giving the unbanked access to the wider, crypto-based financial network. Panama is drawing up similar plans. 

According to a PwC report quoted in The New Scientist, dozens of countries are working on their own version of cryptocurrencies, known as Central Bank Digital Currencies (CBDCs). In the article, “The report claimed that 60 governments are currently working on one and that 88% are basing them on blockchains, the technology behind bitcoin.” 

El Salvador could be the first of many countries to make Bitcoin legal tender or launch their own version of a cryptocurrency. 

Published: Dec 28, 2021
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