Big Move by a Small Country Transforms the Bitcoin Story

11 Jun, 2021
Big Move by a Small Country Transforms the Bitcoin Story

Laser eyes started popping up everywhere on Twitter after El Salvador passed a law on Wednesday that makes Bitcoin legal tender. But it’s not the likes of Tom Brady or Elon Musk who turned on the meme beams, which many in crypto use to signal activation and power. It’s leaders of Latin American countries who are signaling they, too, may be getting ready to adopt Bitcoin as well.

How did this small country, with a population no larger than the Dallas-Ft. Worth metro area, make the bold move that is changing the Bitcoin story?

The answers may lie in the original intent of Bitcoin and how well El Salvador succeeds in transitioning to a crypto economy.

Let's remember that Bitcoin was developed as a peer-to-peer electronic transaction system that would allow everyone – not just those who have access to traditional banking systems – to send or receive money.

That makes Bitcoin a perfect currency for a county such as El Salvador, where more than 70% of its population is unbanked. It's also one of the poorest countries in Latin America. This is probably why the bill received 62 of the 84 votes in the El Salvatore government to approve Bitcoin as a currency. Hopes that the coin will stimulate economic growth abound.

“Every restaurant, every barber shop, every bank — everything can be paid in U.S. dollars or Bitcoin and nobody can refuse payment,” Nayib Bukele, president of El Salvador told a group of crypto enthusiasts in a virtual meet.

“Bitcoiners around the world, the time has come. We are ready. We did our part, now the ball is on your side,” The Wall Street Journal reported was said by William Soriano, a lawmaker who voted yes to the bill.

The new law means Bitcoin is now standing shoulder to shoulder in El Salvador, which adopted the US dollar as its official currency 20 years ago.  The exchange rate between the pair "will be freely established by the market,” Bukele said.

Of course, this bold move has been met with caution by the fiat-currency world. The International Monetary Fund, which provided El Salvador with financial assistance during the Covid pandemic, was among the first major fiat institutions to weigh in on Bitcoin's new status.

“Adoption of Bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis so we are following developments closely and will continue our consultation with authorities,” said Gerry Rice, spokesperson for the IMF, in a press briefing Friday at the G7 conference. “Crypto assets can pose significant risks and effective regulatory measures are very important when dealing with them.”

JPMorgan analysts, who helped lead the charge of institutional investors into Bitcoin, were even more direct in stating that the downslide of the world's first digital currency is still in play. The team cited low demand for Bitcoin futures and the low market capitalization of the coin as key factors in its report.

"We believe that the return to backwardation in recent weeks has been a negative signal pointing to a bear market," JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note released Wednesday, according to a Bloomberg report. "This is an unusual development and a reflection of how weak bitcoin demand is at the moment from institutional investors."

Bitcoin held more than 70% of the digital currency market earlier this year before the May fallout. The current market cap hovers near 40%.

The cautious stance isn’t stopping other Latin American countries to indicate they will follow El Salvador, some sooner than later.

Congressman Carlitos Rejala of Paraguay, who is reportedly working on a crypto bill, added laser eyes to his Twitter profile and tweeted “The moment has come, our moment. This week we start with an important project to innovate Paraguay in front of the world!”

Gabriel Silva, a congressman from Panama, said a proposal is being prepared to present to its Assembly.  “This is important. And Panama cannot be left behind,” he tweeted.  “If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies.”

In Mexico, Senator Eduardo Murat Hinojosa said on Twitter he will be “promoting and proposing a legal framework for crypto coins in Mexico’s lower house.

The unanswered question behind Bitcoin adoption as a currency is how it will be rolled out in the country. No one will be forced to accept Bitcoin, and the government plans to create a $150 million trust that will support the exchange of the digital coin into US dollars for any business or person who doesn’t want to hold the coin.  Those living or doing business in remote areas of the country are exempt from the new law. Those who want to hold the coin can use any crypto wallet, but El Salvador is working with wallet maker Strike to create an official government version.

The country is beginning a 90-day implementation phase to provide training and support for the Bitcoin transition.

The El Salvadoran rollout will provide other countries with a real-time model for how Bitcoin can move from its digital realm into the more tangible world of buying and selling goods and services. And perhaps even more important, it could answer the question of how much impact Bitcoin can have in lifting up those who do not have access to traditional means of moving money.

Laser eyes will be watching this small country that may be leading the Bitcoin transformation.

Joyce Pavia Hanson
Contributor

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