El Salvador becomes first country to adopt bitcoin as legal tender

El Salvador has become the first country in the world to adopt bitcoin as legal tender after its congress approved President Nayib Bukele’s proposal to embrace the cryptocurrency in a bid to promote “financial inclusion”, investment and economic development.

Bukele, a media-savvy former mayor of the capital, San Salvador, who was elected president in a landslide victory two years ago, is known for his love of technology and his fondness for attention-grabbing stunts.

Despite concerns the move could complicate talks with the IMF – where El Salvador is seeking a financing programme worth more than $1bn – the proposal was passed by congress late on Tuesday night with 62 of the assembly’s 84 votes. The congress is controlled by the president’s party and his allies.

The cryptocurrency’s use as legal tender – alongside the US dollar – will go into law in 90 days and the bitcoin/dollar exchange rate will be set by the market. Salvadorans will be able to pay their taxes in bitcoin and “every economic agent” will be required to accept the cryptocurrency as payment unless they lack access to the necessary technology, in which case they will be exempt.

According to the decree submitted to congress, the new law will “regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require to carry out”.

Bukele, 39, had announced the move in a recorded message played at a Bitcoin conference in Miami on Saturday.

“Next week I will send a bill to congress that will make Bitcoin a legal tender in El Salvador,” Bukele said. “In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy, and in the medium and long term we hope that this small decision can help us push humanity at least a tiny bit into the right direction.”

Bukele has suggested bitcoin could make it easier from Salvadorans living abroad to send home the remittances which amounted to $6bn in 2019 – a fifth of the country’s GDP.

The president – who said the new law would “bring financial inclusion, investment, tourism, innovation and economic development for our country” – had earlier added the pro-cryptocurrency “laser eyes” to his Twitter profile picture.

His enthusiasm, however, is not universally shared.

Carlos Carcah, a professor at El Salvador’s Superior School of Economics and Business, pointed out that bitcoin is extremely volatile, meaning investors “run the risk of becoming rich and being poor the next day”. But Carcah added that while the adoption of the cryptocurrency was “neither necessary, nor convenient … as long as there is someone who accepts payment with bitcoin, the same as they accept dollars, there wouldn’t be problems”.

Although Bukele says some 70% of people in El Salvador lack access to traditional financial services, the cryptocurrency’s use for remittances globally is patchy. Converting local currencies to and from bitcoin often relies on informal brokers, prices are volatile, and buying and selling is a complex process that demands technical knowledge.

Opposition lawmaker Rodrigo Ávila of the conservative Arena party complained that the legislation had not been discussed sufficiently by the legislative assembly before it was passed.

Analysts said the Central American country’s experiment would be followed closely elsewhere.

“The market will now be focused on adoption through El Salvador and whether other nations follow,” said Richard Galvin of crypto fund Digital Asset Capital Management. “This could be a key catalyst for bitcoin over the next two to three years.”

Bukele made headlines around the world in February last year when he marched soldiers in combat fatigues into congress and told MPs to approve a loan for new security equipment or be summoned back in seven days for another session.

The president’s concentration of power, attacks on critics and open disdain for checks on his power have raised concerns about El Salvador’s path. However, he has a wide base of support thanks, in part, to the failure of the country’s traditional parties who ruled during the past 30 years to improve people’s lives – and to his ability to provide short-term benefits.