For something that is neither a coin nor a recognised currency anywhere else on the planet, the announcement by El Salvador that it was making Bitcoin legal tender came as a shock to many and a pleasant surprise to some. But what does it really mean to have the cryptocurrency to use as everyday currency and how does the development affect the cryptoverse.
How does one do transactions in Bitcoin?
Interesting question, considering that the way things stand, although the category is called cryptocurrency, these are more a class of assets than money that can be spent to buy things. Further, even though it is called Bitcoin, there is no actual coin that any Bitcoin owner can say that they hold. All they have is a ledger and tokens on that ledger. There is another issue that can be pointed out. One Bitcoin is, at the time of writing, close to $37,500 in value. So, how do you break the Bitcoin when you go to buy that burger?
Any units that Bitcoin is broken down into is called a ‘satoshi’, after Satoshi Nakamoto, the mysterious developer of the world’s first cryptocurrency. So, it is satoshis that a Bitcoin holder has to track. But that is where the complexity begins. Because most countries don’t recognise cryptocurrency, these assets have their own ecosystem for executing and tracking transactions.
Normally one has to create a wallet on their computer or phone, pay money to buy a cryptocurrency and then use the wallet for further transactions. Even so, Bitcoin is known for the relatively long duration it may take for a transaction to be confirmed, which is how its distributed ledger blockchain technology works.
However, there are now options available to link your cryptocurrency wallet with a debit card, which means that when you swipe the card you can pay from your cryptocurrency funds.
What has El Salvador done exactly?
Driven by its President Nayib Bukele, the country has said that Bitcoin can now be used for any transaction in the country, that is, not just transactions involving cryptocurrencies, but for anything at all, like buying a burger for example. “If you go to a McDonald’s or whatever, they cannot say we’re not going to take your Bitcoin, they have to take it by law because it’s a legal tender,” Bukele said on June 9, the day when El Salvador’s national legislature passed the Bitcoin proposal.
The decision is interesting at many levels. For starters, the tiny Central American country of about 6.5 million people does not have any currency on its own but uses the US dollar for domestic transactions since 2001, when the local colón was discarded.
How will the move help the country?
The El Salvadorean economy — its GDP in 2019 stood at $27 billion — relies heavily on money sent back from workers abroad. According to World Bank data, remittances contributed nearly $6 billion, or more than a fifth of its GDP in 2019, one of the highest ratios in the world.
President Bukele has said that Bitcoin will help people from the country easily send remittances home. Remittances are normally sent through specialised firms that charge a fee for transferring money across international borders, but with Bitcoin, or any other cryptocurrency for that matter, the sender need not rely on any such services and can technically transfer funds entirely on their own.
Another issue Bukele said that Bitcoin can address is the lack of financial inclusion in El Salvador. As many as 70 percent of the people of El Salvador lack access to traditional financial services, Bukele said, adding that Bitcoin will “bring financial inclusion, investment, tourism, innovation and economic development for our country”. And, maybe, more residents, too, as Bukele also announced that the country would offer citizenship to people who can prove that they have invested in at least three bitcoins.
But adopting Bitcoin doesn’t mean that the country is doing away with the US dollar. The El Salvador government has said that the use of Bitcoin will be optional and care would be taken to train citizens and ensure it did not pose any financial risks for them. The government has guaranteed convertibility to dollars and also said that people will be able to pay their taxes in Bitcoin.
Bitcoin’s use as legal tender in El Salvador is to begin within 90 days of the legislative nod and the Bitcoin-USD exchange rate will be set by the market.
What does it mean for India?
Market players and experts in India hailed El Salvador’s decision but said that the “Indian economy is an entirely different ball game” when it comes to doing something similar. Sumit Gupta, CEO and co-founder of CoinDCX said that “while we would like the central bank to add Bitcoin to their treasuries, I continue to maintain that India should view and regulate crypto as assets and not currency”.
Gupta, too, noted that El Salvador’s dependence on remittances “is the key reason for their shift to Bitcoin” and added that it will be “interesting to see what happens once this shift takes place”. But he did note that one thing this development indicates is that “crypto is a global phenomenon that is not going anywhere”. With the Centre having said that it is exploring its own digital currency, Gupta pointed out that “countries that acknowledge the fact that crypto assets present a paradigm shift for the future of global finance and embrace it will definitely gain in the long term”.
Nischal Shetty, CEO of crypto exchange WazirX, said that “El Salvador’s decision to embrace crypto is big news for the entire crypto ecosystem”. For him, the takeaway here is that “financial inclusion is the ethos behind crypto, and introducing it in the system will help bank the unbanked in developing countries like El Salvador”.