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Bitcoin As Legal Currency In El Salvador An Opportunity Or Threat

After becoming the first country in the world to declare bitcoin (BTC) as legal tender, El Salvador is considering reaching new goals to boost the economy. The government of Nayib Bukele will rely on the pioneering cryptocurrency to attract new investments, make the reception of remittances more efficient and serve those who are not in the banking system.

In any case, what is the reality in which El Salvador lives? What does Bukele consider in this scenario to achieve his objectives? At this moment his footsteps are followed by the whole world, and his detractors are on the prowl. Fail to? That is what the financial establishment says is going to happen. You’ll make it? It is what remains to be seen.

In CriptoNoticias we analyze what El Salvador and its president will face to make bitcoin a useful tool that allows solving some of the problems that affect its citizens.

We will evaluate how El Salvador is doing in economic and socioeconomic aspects, as well as its capacity to respond to the difficulties that afflict the country. With this, we intend to discover the challenges that the country faces in its quest to achieve its economic recovery.

El Salvador in the economic aspect: a severed economy
Twenty years ago, the Legislative Assembly of El Salvador approved the Monetary Integration Law, which meant the implementation of a dollar standard. It was materialized, although the country did not suffer a crisis that would pressure this change, the government at that time decided that dollarization was the best way.

Two decades after making that decision, economists cannot agree on whether the measure has been favorable or not. For some, it did help the stability of the country, while for others, it eliminated the possibility that El Salvador could adopt its own economic policy, which ended up hindering economic growth, as indicated in a report by El Economista .

However, the current economic scenario in the country sheds light on the effect that dollarization has caused. Its international reserves are diminishing, poverty is growing at an accelerated pace and in general terms its economy is in crisis .

According to data from the Central Reserve Bank (BCR) of El Salvador, the nation has lost 36.6% of its Net International Reserves (RIN). A year ago the country had USD 3,867 million, while in March of this year it had about USD 2,447 million, which is equivalent to a reduction of USD 1,416 million. It means that this kind of savings account that the country has to carry out economic operations with the rest of the world is at its lowest level since 2012 .

The explanation about what may be draining the reserves of the banks of El Salvador is given by the economic analyst Luis Membreño, who believes that it is due to the use that the Government has been making of resources to meet the expenses of the emergency due to Covid- 19.

In this sense, what has happened is that the Liquidity Reserve or the guarantee of the deposits of the citizens that the banks have has been used by 46% in the last year. These funds have been granted to the Government in Treasury Bills and Treasury Certificates, therefore, it owes the banks about USD 2,600 million in short-term debt , as commented by Membreño .

On the other hand, amidst liquidity shortages and the decline in international reserves that reflect signs of capital outflows, the Government has limited capacities to recover its economy.

The level of debt is considered unsustainable according to the Economic Situation Report published on June 3 by the Salvadoran Foundation for Economic and Social Development (Fusades), which raises the need for the Government to sign an agreement with the International Monetary Fund (IMF ).

El Salvador’s public debt reaches 89.8% of GDP, which places it in fifth place with the highest debt in Latin America , according to the IMF. Against this background, economists only see it possible for the government to make decisions regarding a tax reform and also to resort to international organizations to cope with its crisis.

However, that only seems to show that it would continue to borrow and base its projection on uncertainty, because according to the IMF , the whole world is facing the worst crisis since the great depression of the 1930s.

Bitcoin, an economic lifeline?
When Nayib Bukele launched the proposal to make bitcoin legal tender in El Salvador at the Bitcoin Conference in Miami , his announcement immediately resonated in every corner of the globe. Many celebrated, but there were also those who frowned. Ideas were reeling in their heads, what do you eat that with? They wondered.

The doubts are reasonable, understanding that it is an unprecedented situation. However, then Bukele himself shed light on his plans when he revealed that the government will create a trust fund of USD 150 million in the nation’s Development Bank, which will be the body in charge of guaranteeing the automatic and instantaneous convertibility of bitcoin to dollar. . Although until now, neither Bukele nor the Legislative Assembly have detailed what will be the source of financing to acquire these USD 150 million.

Beyond doubts about how Bukele’s plan will be implemented, questions turn to whether, in effect, the Bitcoin Law will boost the economy. For Oscar Cabrera, former president of the Central Reserve Bank (BRC), there is no doubt that having turned bitcoin into a legal currency in El Salvador represents a threat .

From his perspective, the use of bitcoin as a legal exchange currency could lead the Central American country to become a tax haven because “the possibility of tax evasion and money and asset laundering is opened,” as he pointed out for a media outlet. local communication. However, before his approach, one would have to ask: is that what really matters at this moment?

On the other hand, Peruvian journalist Juan José del Castillo maintains that Bukele is turning to bitcoin because he sees a financial blockade and other sanctions coming from the United States.

In this regard, del Castillo makes it clear that he considers the adoption of bitcoin by El Salvador a good measure. «Bukele is showing his wide view of the moment in which we move. Who will block bitcoin? How do you go about banning people from sending bitcoin to El Salvador? There is no way to prevent it, “he said before an imminent blockade.

Political analyst and social leader José Dagoberto Gutiérrez also believes that Bukele’s movement is smart. “The United States continues to print money without material basis, especially in the scenario of managing the pandemic, so the measure of adopting bitcoin allows it to escape from the teeth of that beast,” he said to refer metaphorically to inflation.

Gutiérrez is convinced that El Salvador needs a profound economic , political and social transformation , and that with bitcoin he has the opportunity to put it into operation. “This is a moment of reconstruction of a correlation within the State apparatus that is part of the recovery of that State,” he added during an interview . He then invited Salvadorans to maintain a critical spirit in the face of the changes that are to come.

From dollarization to bimonetarism with bitcoin
In El Salvador, the Monetary Integration Law was enacted 20 years ago, which gave way to bimonetarism. At that time, by decree, the country launched what is known as dollarization.

However, in El Salvador the so-called bimonetarism does not exist, since the dollar replaced the colon , while the national currency ended up disappearing . Until now, the dollar has been used in all its functions (reserve of value, unit of account or means of payment).

In any case, with the legality of bitcoin, it is possible to speak of bimonetarism in El Salvador, because now, two currencies will be actively participating in the country’s economy: BTC and the dollar.

In this sense, we find a particular point of view of classical economic theory , contained in Gresham’s Law, whose principle indicates that when two types of legal tender coins circulate simultaneously in a country, and one of them is considered by the public as “good” and the other as “bad,” the bad coin always drives the good out of the market.

Under this approach, from now on it will be interesting to observe which of the two currencies will be classified by Salvadorans as the “good” and which the “bad”. It means that one of the two will leave the economic circuit because citizens will prefer it to store it , rather than get rid of it. On the contrary, only the “bad currency” will remain for trade because no one will treasure it.

At this point, bitcoin could take the upper hand as it is increasingly used as a store of value . Some investors use cryptocurrency as an alternative to local fiat currency in countries with high inflation rates, while, in countries with lower inflation, they trade it speculatively, generating a catalyst for a “significant” increase in the price of bitcoin.

El Salvador in the socioeconomic aspect: The dollar rides on the shoulders of Salvadorans
El Salvador, with more than 7 million inhabitants, has an economic structure based on the tertiary sector, highly dependent on remittances and a growing informal sector that includes approximately 70% of jobs.

However, a report published by the Inter-American Development Bank (IDB) shows that the social benefits implemented by the government to support people affected by the covid-19 pandemic will not prevent some 478,000 Salvadorans from falling into poverty this year as The result of job losses and lower wages, a product of the pandemic. The figure will represent a 7.4% increase in poverty by the end of 2021.

Given this scenario, how will bitcoin help citizens? According to Bukele, the adoption of bitcoin as the official currency will help rescuers have an alternative to access financial services, since approximately 70% of the population does not have access to traditional services.

The government will support citizens to achieve technological adoption that will allow them, in the near future, to download a government application on their devices to make and receive payments with BTC .

The development of the government platform will be in charge of Strike, a project of the Zap company, a company with little more than a year of life and that launched Strike Global at the beginning of this 2021.

Beyond this is the fact that 22% of all the Gross Domestic Product of El Salvador is represented by remittances. The entry of remittances to the country between the last months of January and March totaled USD 2,350 million. With this figure, the nation positioned itself as the Central American country with the highest growth rate in the income of remittances so far in 2021 , according to the Central Reserve Bank .

Remittances is also a field in which bitcoin can contribute, considering that it allows the possibility of transferring those billions of dollars in remittances and avoiding that a good percentage remains in the hands of intermediaries.

On the other hand, on the social side, bitcoin has already made its mark in El Salvador, where it is used to transform the lives of hundreds of young people who do volunteer work and at the same time know how to receive incentives with the main cryptocurrency on the market.

It is about the project of the religious organization Missionsake, baptized as Bitcoin Beach or Playa Bitcoin de El Zonte, in the department of La Libertad in El Salvador. A formula that teaches young people to stay away from violence, bearing in mind that the country is the most violent in the world without a declared war.

Bukele had pointed out that legalizing Bitcoin will help him attract new investments for El Salvador. He knows that to rescue the economy from the crisis, he must strive to raise GDP. It also requires creating new jobs and reducing the informality rate, so capturing the attention of the cryptocurrency industry represents an opportunity.

With the approval of the Bitcoin Law, El Salvador now becomes an attractive financial center within the industry that revolves around Bitcoin. Especially, because unlike what other nations offer, the pioneer cryptocurrency can be exchanged directly for goods and services without major tax consequences, with the added advantage that the law recognizes the transaction as a legal payment of a debt.

Investors who bet on El Salvador will not have to pay taxes on capital gains in bitcoin , since the cryptocurrency is legal in the nation, and, as if that were not enough, Bukele offers them immediate permanent residence for entrepreneurs of the ecosystem. Given this offer, surely many would be making their plans to settle in El Salvador.

On the other hand, the Salvadoran president is drawing up a plan to offer low-cost energy to Bitcoin mining farms that wish to establish themselves in the country. For this, it promises 100% clean energy, 100% renewable and with zero emissions, taking advantage of volcanic activity.

Conclusions
Twenty years ago, El Salvador’s economy became dollarized and, immediately, the colones stopped circulating. It was then that the dollar became the only currency in the country. One of the advantages most cited by economists is that dollarization avoids the risk of a deep and sudden devaluation, but at the same time they add that it has left a deep negative footprint, reflected in poverty, unemployment, the fall in international reserves. , as well as other difficulties that limit the government’s response capacity to act in the current economic crisis facing the nation.

One of the most negative effects of dollarization was the destruction of local industry and, therefore, the generation of employment. For this reason, for years, El Salvador has lived off the export of its workforce, that of thousands of immigrants who seek to settle in other countries with the mission of sending money to support their families .

In short, a huge social cost that has not been shaken. These are problems that have been accentuating their dependence on the United States and the dollar.

Against this backdrop, bitcoin appears to have been presented to President Bukele as a revelation. In fact, he mentioned it recently during a conversation through Twitter Space with several bitcoiners, to whom he revealed the real reason why he was motivated to legalize the pioneer cryptocurrency.

At that time, he pointed out that he was inspired by the Playa Bitcoin project in the El Zonte community , a pilot program that has transformed the lives of Salvadorans living in the area and that he now wishes to replicate on a large scale.

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