The green shadow that the US dollar is casting on developing countries is being lifted. In El Salvador it is now shortly before noon.
When I grew up in El Salvador during the civil war, I never thought that I would experience my homeland with so much hope for the future, let alone groundbreaking for others. The law recently passed by the government making Bitcoin legal tender is slated to go into effect on September 7, making it the first country in the world to do so.
The catalyst behind the bold move is Salvadoran President Nayib Bukele, a forward-thinking, entrepreneurial leader who created a blueprint for other countries such as Paraguay, Mexico, Panama and Venezuela. Bukele is the first president to be elected outside the two big parties since the civil war, the youngest president in history (aged 37), and he won on a platform of modernization. Bukele keeps his series of premieres alive by shedding light on how Bitcoin can transform the country’s financial system for the better and by showing other emerging market countries a way to get out of the USD’s shadow.
A brief history of the currency in El Salvador and why Bitcoin is sovereign
Today El Salvador has no national currency.
The Colón, named after Christopher Columbus, was the currency of El Salvador, but was given up in 2001 for the US dollar. The purpose was to contain inflation and increase trade with the US, a major trading partner. The tendency of developing countries to borrow in USD rather than their own currency is sometimes referred to as “original sin” because it reflects the fact that their currency is less accepted worldwide. Borrowing in USD enables developing countries to pay for essential goods that would otherwise be unaffordable. This concept, known as dollarization, occurs when a country’s currency loses its usefulness as a medium of exchange due to hyperinflation or instability.
Cryptocurrency stands for the modernization of democracy and creates equal conditions for the underserved. The introduction of Bitcoin as legal tender in El Salvador gives hope to the people who need it most, not just in El Salvador but across the region.
By introducing Bitcoin as legal tender, El Salvador is betting that over time, Bitcoin will:
- More accepted worldwide
- A deflationary medium of exchange
- A launch pad for the economic development of El Salvador
In El Salvador, it has long been a challenge to develop new growth sectors for a more diversified economy. Bitcoin is an advanced way to achieve this goal by creating a haven to attract talent and increase GDP. For example, as part of the law, President Bukele offers an incentive to foreigners to gain permanent residence in El Salvador by investing 3 BTC in the country.
Bitcoin can repair wire transfers and banking
Bitcoin will work better as legal tender for a number of reasons.
El Salvador is heavily reliant on remittances, which account for 21% of its GDP, the second highest of any country in the Western Hemisphere. Bitcoin can make transfers easier by working with or removing intermediaries and reducing the cost of overseas payments. Many critics of this approach point to the high fees associated with the Bitcoin network that make transfers impractical, but they ignore the Lightning Network.
For example, sending a $ 10 payment within the Lightning Network would cost one satoshi (the smallest unit of a bitcoin, equal to 100 millionths of a bitcoin) to complete the transaction in one second. Other reviewers point to the difficulty in sending and receiving Bitcoin. But take it from me, I recently sent Bitcoin to my mother in El Salvador without a glitch. If my mother, who is over 80, can do it, everyone can too.
In El Salvador, 70% of the population do not have a bank account. People without a bank account face enormous challenges when it comes to saving and building wealth. They also have to work in the shade because they are excluded from the mainstream of the local economy, which often leads to exploitation. The introduction of Bitcoin will give them access to the local economy and beyond, worldwide.
A new era for bitcoin mining
It’s no secret that El Salvador is a developing country looking for economic growth. El Salvador has historically produced gold and silver, but attempts to reopen the mining sector collapsed after former President Antonio Saca shut down Pacific Rim Mining Corporation in 2009.
With the advent of the new “mining” sector and the commitment of the Bitcoin mining community to adopt more renewable energy standards, President Bukele is considering the use of geothermal energy from volcanoes.
The same entrepreneurial, fast-paced approach is also being shown in the United States by the likes of Francis Suarez, the Mayor of Miami, who is creating some sort of cryptocurrency hub. In fact, more and more government leaders are using this method to attract entrepreneurs, which boosts the economy.
Bitcoin’s obstacles around the curve
As with any change in the law, especially when accepting a new tender, there will be challenges. Think about what it took for the US dollar to get to what it is today. It lasted six decades, war and controversial bait and switching tactics. The introduction of Bitcoin will not be flawless, but it will be peaceful, transparent and immutable.
Bitcoin is still in the maturity phase and the whole world is still trying to figure it out, which takes time. Education is in the foreground.
Since Bitcoin is a digital currency, digital compatibility is required in addition to digital compatibility. In 2017 (the latest survey available), only 37.1% of the population of El Salvador owned smartphones, underscoring some of the large technology gap that needs to be bridged.
While El Salvador is taking a bold risk, the asymmetrical advantage of adopting Bitcoin as legal tender can change the world for the better. One thing is certain: the world is watching El Salvador. How many times in your life has that been true?
This is a guest post by Mario Gomez Lozado. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.