Recently El Salvador announced the adoption of Bitcoin as the second legal tender in the country, currently the dollar is the first. Shortly after, President Nayib Bukele announced that the country will mine BTC using energy from volcanoes. He said it will be “very cheap, 100% clean, 100% renewable, 0 energy emissions from our volcanoes.”
From a technological point of view it is great news for the world of cryptocurrencies, El Salvador is the first country to fully support the popular digital currency in its local economy. After this announcement, its price skyrocketed as happens every time someone influential provides support.
The law that will enter into force within three months , establishes that “all economic agents will accept bitcoins as a form of payment when it is offered by the buyer of a good or service.” It also says that tax payments can now be made with bitcoin.
Bukele had said in a tweet that using bitcoin as legal tender would promote financial inclusion, tourism, innovation and economic development. And with these words, President Bukele, who has a recent majority in Congress and is very popular in his country, defined the strategy that the small Central American country has for Bitcoin.
El Salvador could immediately benefit from international tourism from entrepreneurs or tourists who have large amounts of Bitcoins in their digital wallets.
But what do the big players in international finance say about this risky step by El Salvador?
Long-term strategy and impact
Nayib Bukele , current president of El Salvador, affirms that adopting cryptocurrency “will create jobs and help provide financial inclusion to thousands of people outside of the formal economy.”
The Minister of Commerce and Investments, Miguel Kattan, said that bitcoin already had limited use in El Salvador, including to buy pupusas, the national street snack. “The ability to carry out operations with bitcoin should not cause concern,” said Kattan in a press conference.
Merchants in El Salvador were already free to accept bitcoins as a form of payment. However, once the new law takes effect several months from now, they will be asked to do so unless they do not have access to the necessary technology. People will also be able to pay their taxes in bitcoins.
The US dollar will continue to be El Salvador’s main currency, Miguel Kattán, El Salvador’s trade and investment secretary, said, according to El Mundo, a Salvadoran newspaper. Products must be priced in US dollars, rather than bitcoins, which tend to fluctuate wildly and involve long strings of decimal places.
The government also intends to establish a US $ 150 million trust in El Salvador’s development bank that will allow citizens to convert bitcoins into US dollars. But it is not yet clear how the exchange rate would be determined.
Remittances from citizens living abroad account for about a fifth of El Salvador’s gross domestic product, according to World Bank figures, and Bukele believes that Bitcoin has the potential to transform the way money is sent through networks. borders.
Bukele believes it can, and has asserted that the amount of money low-income families receive from remittances “will increase by the equivalent of billions of dollars each year” because intermediaries will no longer receive a share.
But sending remittances to El Salvador is already relatively inexpensive, because using US dollars means payments don’t have to go through foreign exchange, said Alex Holmes, CEO and president of MoneyGram, a money transfer company.
It is not clear if Bitcoin will be widely adopted in El Salvador, where many people do not have access to the internet. Bukele said in a recent tweet that the government plans to build a satellite infrastructure that will allow rural Salvadorans to connect to the internet, but that could take a long time and could never happen.
Mining using volcanoes
It seems like a crazy idea, but it is doable. In a live chat on Twitter Spaces Tuesday night, Bukele announced an idea that had suddenly occurred to him “El Salvador’s volcanoes could be used as a renewable source of geothermal energy.”
“Every day is going to be a new idea,” Bukele told an audience of more than 25,000 people, according to Coindesk. The next day, he announced on Twitter that he had directed the country’s state geothermal electricity company to develop a plan that would allow bitcoin miners to harness the “very cheap, 100% clean, 100% renewable and zero-emission energy from our volcanoes.” ».
Hours later, Bukele said that engineers had already dug a new pit that would become the center of a new bitcoin mining hub and shared a video of the steam coming out. The strategy is still unclear at this point. Can digital miners do it by harnessing the energy of volcanoes? Or only the government will do digital mining.
The JPMorgan Report «The Bitcoinization of El Salvador»
Investment bank JPMorgan released a report on Friday titled “The Bitcoinization of El Salvador.” And it states the following: «El Salvador recently approved legislation that converts Bitcoin into legal tender and will attempt to implement a bimonetary system with the US dollar as the main unit of account, but requiring that Bitcoin be accepted as payment for the entire economic activity”.
The investment bank added that “as with dollarization in the early 2000s, this move does not seem motivated by stability concerns, but is geared towards growth,” explaining:
It’s hard to see any tangible economic benefits associated with adopting bitcoin as a second form of legal tender, and it can jeopardize negotiations with the IMF.
El Salvador is currently seeking $ 1 billion in loans from the International Monetary Fund, and some analysts have warned that Bukele’s sudden decision to adopt Bitcoin could complicate those discussions.
An IMF spokesman said Thursday that the move “raises a number of macroeconomic, financial and legal issues that require very careful analysis” and that the organization would discuss its concerns with Bukele.
An official from the Bank for International Settlements (BIS ) has also expressed doubts about El Salvador’s Bitcoins law, calling it an “interesting experiment,” but emphasizing that the BIS does not see that Bitcoin can function as a means of payment.
The JPMorgan report further notes that there are doubts about how the larger economies will treat Bitcoin when it is legal tender in El Salvador. The bank warned that any treatment change “could be said to be an unintended consequence of laws and regulations that are significantly older and understandably did not anticipate cryptocurrency.” However, the bank said:
Those moves can be tricky if this is the beginning of a broader trend among smaller, like-minded nations.
Although the idea that a country fully supports Bitcoin is great news for cryptocurrencies in general, it is still a very risky bet not only for the economy of a country that is struggling to get up economically, but also for its citizens who will be exposed to the rise and fall of Bitcoin. A volatile market that one day can make you a millionaire and the next day you can lose everything.