El Salvador has become the first country in the world to adopt bitcoin as legal tender. On Wednesday, the Salvadoran Congress approved a bill drafted by President Nayib Bukele to make bitcoin legal tender. The bill passed with 62 out of 84 possible votes, a supermajority.
Now that the bill has passed into law, in El Salvador prices can be denominated in bitcoin, tax contributions can be paid in bitcoin, exchanges in bitcoin will not be subject to the capital gains tax, and merchants must accept bitcoin as payment. The entire bill can be read in full here.
According to Coindesk columnist Frances Coppola, by adopting bitcoin El Salvador is committing to a hard-currency peg and more monetary discipline, breaking with its monetary and fiscal policy dependence on the US.
As we highlighted in a whitepaper published last year, bitcoin could become an important savings vehicle in emerging markets, so much so that businesses might demand payment in bitcoin instead of fiat. If so, the velocity of their fiat currencies would accelerate, causing currency devaluation and exacerbating inflation as measured by their sovereign currencies. In the unfortunate event of hyperinflation, fiat-denominated debt would become worthless and dollar-denominated bonds unpayable.
While the Bitcoin network has not evolved enough to service an entire economy, in our view the demand for bitcoin in emerging markets could increase as its infrastructure scales and reaches critical mass. We believe iif bitcoin were to capture just 5% of the global monetary base outside of the four largest fiat currencies - US dollar, yen, yuan, euro - its market cap could increase by roughly $2 trillion.
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