On June 9, the Republic of El Salvador passed the "Bitcoin Law", becoming the first country in the world to recognize bitcoin as a legal currency. Finally, bitcoin has become the legal currency of a normal country. El Salvador had no way to resist the over-issuance and inflation of US dollars, so it had to choose the bitcoin. Many countries are facing the same problem as El Salvador. The Latin American countries dominated by US dollars are all seeking a way to get rid of the blood-sucking US dollars. Behind the historical development of bitcoin, it is a common problem that many Latin American countries are facing. El Salvador’s decision may become an example for other Latin American countries.
Bitcoin Boom
On June 6, Nayib Bukele, El Salvador’s President, announced that he would submit an act of using bitcoin as the country’s legal currency during Bitcoin 2021. El Salvador is on its way to becoming the first country in the world that recognize bitcoin as its legal currency.
After that Nayib Bukele switched his Twitter profile picture to laser eyes and listed 4 advantages of El Salvador in his next post:
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Great weather, world class surfing beaches, beach front properties for sale.
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One of the few countries in the world with no property tax.
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No capital gains tax for #Bitcoin, since it will be a legal currency.
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Immediate permanent residence for crypto entrepreneurs.
Laser eyes have recently become popular on Twitter. People give themselves laser eyes to show that they support bitcoin. Paris Hilton, the successor of Hilton Hotel, Tom Brady, an American football superstar, Elon Musk, Tesla’s CEO, Ricardo Salinas Pliego, the third richest person in Mexico, Cythia Lummis, an SEC member, and some other celebrities all once participated in the laser eye event.
On the morning of June 9, Nayib Bukele kept his promise and submitted the proposal for the Bitcoin Law to the Salvadoran Congress for voting.
On the afternoon of June 9, the Salvadoran Congress passed the Bitcoin Law by an overwhelming majority of 62 out of 84 votes.
Although the Bitcoin Law is concise, it states several key rights of bitcoin, including bitcoin can be used for marking prices, bitcoin can be used for paying taxes, no capital gains tax for bitcoin transactions, and payments made using bitcoin shall not be declined.
Small Country El Salvador
El Salvador is located in the north of Central America. It has a land area of 2.07 square kilometers. In 2019, its total population was 6.705 million. The country’s GDP is 26.75 billion US dollars (around RMB 170.932 billion) and has a per capita GDP of 3941.88 US dollars (RMB 25188.61). Its economy is based on agriculture. The country mainly exports products like coffee, cotton, sugar, shrimps, and textiles. Due to its weak industrial base, foreign trading accounts for more than half of the country’s GDP. El Salvador is one of the mid-to-low-income countries.
Compared with countries like China and the US, El Salvador is a small country. The area of its land is similar to a city in China. For example, Yi Chang has an area of 21000 square meters, and it is slightly bigger than El Salvador. Yi Chang has a permanent resident population is 4.1379 million and it is about 60% of El Salvador’s population. In 2019, Yi Chang’s Regional GDP was RMB 446.082 billion, which is 2.6 times El Salvador’s GDP. Yi Chang’s per capita GDP is RMB 107830, which is 4 times El Salvador’s per capita GDP.
Why Do People Favor Bitcoin
The reason why El Salvador implemented the Bitcoin Law is closely related to El Salvador’s currency policy, dollarization. Dollarization means replacing the domestic currency with US dollars.
A lot of Latin American countries are politically unstable and economically weak. For example, the Republic of El Salvador was founded in 1831. Since the 1930s, the military has launched coups numerous times and its political situation has been unstable for a long time. In 1980, the civil war broke out. The two sides are the government supported by the US and Farabundo Marti’s national liberation front supported by Cuba. In 1992, the government and the Marti Front signed the Peace Agreement. The agreement marks the end of El Salvador’s 12-year-long civil war.
In 1998, Latin America’s economic growth dropped greatly from 5.2% to 2.3% due to the economic crisis in East Asia and Russia. The country’s fiscal revenue and expenditure deteriorated, and the proportion of public fiscal deficit in GDP increased from 1.4% in 1997 to 2.4% in 1998. In 1999, the economic growth rate of Latin America was - 0.3%.
To stabilize the economy, dollarization became popular in Latin American countries.
In January 1999, Menem, Argentine President, announced that the Argentine government was seriously considering dollarizing the economy. The announcement triggered a heated discussion in Latin America. In January 2000, Ecuador officially implemented dollarization. In January 2001, El Salvador announced that US dollars had become its official currency. After that, Puerto Rico also started dollarization. Peru, Bolivia, and Guatemalan also implemented incomplete dollarization, that is, the simultaneous circulation of US dollars and domestic currencies. Panama completed its dollarization in 1904.
However , after dollarization, the Latin American countries lacked an independent currency policy. Their currency policy was actually decided by the US and the US would only consider its benefits when creating the policy.
In 2020, COVID-19 severely damaged the global economy and the US implemented multiple rounds of fiscal stimulus. The funds of the fiscal stimulus come from issuing government bonds. The central bank bought those newly issued bonds, so the government debt rose rapidly. According to the theory of fiscal deficit monetization, the central bank needed to keep printing money to repay the local currency debt. The US had a fiscal deficit of US $3.7 trillion in 2020 and a budget deficit of US $2.3 trillion in 2021. According to statistics, one-fifth of the US dollars currently circulating in the market were printed in 2020. The over-issued US dollar leads to the rise of product prices and reduces the purchasing power of dollarized countries.
Too far from heaven, too close to the US.
The central banks of different countries will create active or tightening currency policies based on the countries’ economic development. When the financial crisis comes, over issuing currency is the most straightforward stimulus. However, bitcoin is not issued by a central institution, it is produced by a ton of calculations using a specific algorithm. There are only 21 million bitcoins in this world and over issuing bitcoin is impossible. As more and more people start using bitcoin, it will become more and more sacred, so it can avoid inflation. Risk evasion is one of bitcoin’s features. When the economy is going down, bitcoin can resist inflation.
Actually , the over-issued US dollars are the reason why the institutional investors are worried. Institutions like Grayscale, Microstrategy, Ruffer, and Tesla all invested in bitcoin, and this is what caused the 4-month bitcoin bull market.
Follow -ups
After El Salvador recognizes bitcoin as its legal currency, over 6.7 million people have become bitcoin’s potential users. According to the data provided by Feixiaohao, after Nayib Bukele submitted the Bitcoin Law on June 9 at 10:00, bitcoin’s price stopped falling at around US $32,000 and started rising. After the congress passed the Bitcoin Law at 14:00, bitcoin further rose to over US $37,000 on June 10 at 11:00. Currently, bitcoin is fluctuating around US $37,000.
As for bitcoin becoming the legal currency of El Salvador, Jiang Zhuoer, CEO of LTC, said in his Weibo post that this was a historical moment for bitcoin. He thought people started recognizing the value of bitcoin and it was possible for bitcoin to become a currency used for international bulk trading in the future.
Celine , BitFuFu’s independent director, thought that El Salvador was an opportunity to verify the application of bitcoin, and becoming the legal currency was just a start. Even if El Salvador’s implementation of bitcoin did not meet people’s expectations, it was still a precious sample for the world.
Sun Yuchen, the founder of TRON, said that he was optimistic about the future of El Salvador and he planned to exchange all the US dollars he had into the legal currency of El Salvador.
On June 7, Carlitos Rejala, the national representative of Paraguay, made a post on Twitter saying that he would start an important project that would help Paraguay take the lead in the world. Tags of bitcoin and PayPal, and a laser eye picture were attached to his post.
On June 8, after the post made by the President of El Salvador, Francisco Sanchez, the national representative of Argentine, also posted a laser eye picture on Twitter, and said that “I can’t believe but this is what happened”.
On June 9, after Bitcoin became the legal currency of El Salvador, Gabriel Silva, a parliamentarian in Panama, also said that he was also working on a proposal to include bitcoin and other encrypted currencies in the scope of Panama’s legal currency.
In addition, Latin American politicians like Eduardo Murat Hinojosa, a member of the Mexican legislature, Fábio Maia Ostermann, an election candidate of Rio Grande Do Sul’s legislative assembly in Brazil, Jehudi Castro Sierra, the Adviser to the President of Colombia and Deputy Minister of Digital Economy, and Julio Eduardo Clavijo Acosta, the Deputy Minister for Economic Inclusion of Ecuador, also showed interest in bitcoin.
Those countries are all Latin American countries deeply affected by dollarization. In the future, we may see more Latin American countries accept bitcoin.
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