El Salvador became the first nation in history to formally recognize Bitcoin as legal cash in 2021. President Nayib Bukele supported the decision, which was also approved by the Legislative Assembly of El Salvador. The principal aim was to augment the economy by broadening Salvadorans' access to financial services and drawing in foreign capital. However, the acceptance has generated conflicting responses in El Salvador as well as abroad, with worries centered on the volatility of Bitcoin, its effects on the environment, and the openness of the government's fiscal policies.
Background and Dollarization.
El Salvador used the colón (SVC) as its official currency until switching to the US dollar in 2001, before embracing Bitcoin. The goals of dollarization were to reduce transaction costs for global trade and to establish financial stability. It also presented difficulties, including as the loss of governmental authority over monetary policy and a fixed exchange rate that decreased the purchasing power of the general public. Even though remittances made up a large portion of El Salvador's GDP, the country's financial literacy rate remained low.
Legislative Milestone.
El Salvador's decision to accept Bitcoin as legal cash did not happen overnight; rather, it resulted from a major legislative victory. The "Ley Bitcoin" or Bitcoin Law was quickly approved by the Salvadoran Congress in June 2021, following its proposal by President Nayib Bukele of the country. This law aimed to reduce remittance costs for Salvadorans living overseas, a group that has significant influence over the nation's GDP, and to increase financial inclusion by utilizing the advantages of cryptocurrencies, particularly Bitcoin.
Bitcoin Adoption in El Zonte ("Bitcoin Beach").
An unknown donor gave the village of El Zonte $100,000 in Bitcoin in 2019, with the understanding that El Zonte will use the cryptocurrency as a payment mechanism and promote a circular economy based on it. Locals adopted Bitcoin through mobile devices and Bitcoin ATMs because they did not have access to traditional financial services; as a result, El Zonte gained the nickname "Bitcoin Beach" and became a model for the use of cryptocurrencies as legal tender.
Bitcoin ATMs and Chivo Wallet.
El Salvador has been aggressively setting up Bitcoin ATMs throughout the nation; at now, there are 1,500 Bitcoin ATMs in use. The proud nation is ranked third in the world for the number of Bitcoin ATMs installed. Users may conveniently purchase, sell, and transact with Bitcoin using these ATMs.
Chivo is the official Bitcoin wallet supported by El Salvador's government, and it was created to make local Bitcoin transactions easier. Initial problems with the Chivo wallet included missing cash and system malfunctions. El Salvador teamed up with white-label infrastructure vendor AlphaPoint to resolve these problems. The new Chivo wallet, which aims for social effect, scalability, and stability, now interacts with AlphaPoint.
Through Lightning addresses and QR codes, it enables low-cost Bitcoin transactions that are almost immediate. In the first month of operation, Chivo onboarded 2.1 million Salvadorans, or 75% of the whole population. Utilizing the Lightning Network as well, the application has increased payment volume by 400% in the last year.
Bitcoin City and Volcano Bonds.
In 2021, President Nayib Bukele revealed intentions to build a "Bitcoin City" at the foot of the Conchagua volcano, using only Bitcoin as funding. Except for a value-added tax that will be used to pay for city services, this city will run entirely on geothermal energy. The idea was inspired by the Greek city-states of antiquity, where the introduction of a single currency promoted economic development and trade. The goal is to create a thriving city center where everyday transactions mostly include Bitcoin.
The creation of "Volcano Bonds," a sort of financial instrument that promises investors a 10% yield and is backed by both Bitcoin and the city's future earnings, will be used to finance the development of Bitcoin City.
El Salvador's Bitcoin Reserve Assets.
El Salvador's President Nayib Bukele has continuously supported the country's adoption of Bitcoin. He committed more than $120 million of the nation's funds to buying Bitcoin beginning in 2021. The 2,764 Bitcoins he acquired are now worth more than what he paid for them, making the investment a profitable one. The prospective profits, if he were to sell them now, might be close to $3.7 million. This accomplishment has drawn praise and criticism in equal measure.
Challenges and Criticisms.
Even while El Salvador has become more aware of Bitcoin, its integration has not been without problems and criticism. One of the main concerns is that Bitcoin values are erratic. The volatility of cryptocurrencies, according to critics, might put the Salvadoran economy in danger and have an effect on residents and businesses who might see sudden swings in the value of their assets.
In addition, some sections of the Salvadoran populace have shown disapproval through rallies against the government's transition to a decentralized financial system. Some people are concerned about possible privacy implications and wonder if the government should be monitoring bank activities.
My Thoughts.
I respect El Salvador for taking the lead in accepting Bitcoin. Even though it is a small country, it is representative of many that have struggled with financial difficulties and are frequently at the mercy of the Federal Reserve Bank of the United States. El Salvador has the chance to overcome this reliance and lead the way toward a more equitable financial system that benefits all of its population by embracing Bitcoin.
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