El Salvador’s Experiment: The First Test of Bitcoin’s Viability as Legal Tender

Since 2016, cryptocurrency has been viewed by the majority as a speculative asset. This opinion has been buoyed by the near-constant drastic price swings, the behaviour of the community on online forums on Reddit, the waning quality of new cryptocurrencies, and the power-intensive ‘mining’ of blocks through the use of supercomputers and GPU arrays. The mining of Bitcoin as a whole utilizes 121.36 Terawatt-hours – more than the whole of Argentina.

Underneath the memes and countless scams, the original cryptocurrency (Bitcoin) was originally designed to be a currency controlled by the people, wired to rely upon the computers of those holding it. Created by an anonymous user or group going by the pseudonym ‘Satoshi Nakimoto’, multiple theories have been raised as to who created it or why they might have done so – although, within the code of the first block mined, there is a reference to the 2008 recession and the huge bail-out for banks at a time when many had to face the recession with no government assistance. Bitcoin lends itself to an online world, and transfers have moved beyond the simple exchange of long code, being easily transferred between accounts through apps like Coinbase. However, mainstream adoption in the first world has been precluded by price swings and the relative stability of government fiat currency, no matter how corrupted that fiat has become.

This is not the case in the developing world. In countries with high inflation and corrupt governments, Bitcoin is a precious source of outside stability which is used in many direct transactions, cutting out the necessity for banks and other infrastructure which is simply not accessible to users in many of these developing countries. According to the EBV, 1.7 billion people, mostly in impoverished countries, do not have access to a bank account, hindering them from entering small-scale industry and developing an economic base upon which more may be built. Bitcoin, which needs no account nor paperwork except Wi-Fi and a mobile phone, has incredible potential to make transactions and record-keeping more accessible. 

To top it off, it also increases security from state interference. Bitcoin has complete security, as each block is insulated from the rest of the blocks and hosted on a different computer. The only way to access bitcoin for trade is to input a ‘wallet phrase’ consisting of 28 random numbers. This has the potential to keep the assets of dissidents and businesses safe from oppressive regimes, depriving them of one of their methods of control. Bitcoin, then, is in prime position for full adoption as legal tender in many areas, as its flaws are mostly contained to exchange rates.

El Salvador holds a unique place within the cryptocurrency world. As a small, unstable state reliant upon the USD as it has no national currency, the country is already seeing bitcoin as one of its most-utilized payment methods. The law passed on 09/06/21 is set to make it legal tender in 90 days. El Salvador’s reliance on the dollar, therefore, may be ended. However, there are still significant issues – for example, Bitcoin is extremely volatile, which could render the assets of businesses and people improperly assessed. 

El Salvador will face numerous challenges, especially regarding tax policy and the regulation of assets in a legal tender which is prone to fluctuation. Lawmakers will have to conduct an assessment of wealth and overall gain/loss of the upcoming year in order to best calculate their revenue. This will present a significant challenge for an already cash-strapped country in enforcing new rules. Bitcoin’s volatility could also prove difficult in more macroeconomic terms. This new tender could simply not be adopted by the people who may prefer to rely on the currently more stable dollar, which would induce an interesting problem – taxable assets may be hidden by the rich while those without assets to lose remain tied to the dollar. El Salvador will need to find out how to regulate crypto holdings while maintaining the clarity and security of the blockchain to keep taxes flowing and crypto utilisable.

The overall view on adopting cryptocurrency in stable, first world currencies will probably remain steadfastly negative. It is currently unfeasible to adopt such an unstable currency into the mainstream, especially regarding the problem of taxation, which is already extant in rich countries. This is not aided by the current ‘PR problem’ of Bitcoin, with most first-world users introduced to the concept through a lens of speculation. However, the situation in areas without stable currencies is far more fluid. According to Statista, over a third of Nigerians already use crypto to some extent. This is also reflected in Southeast Asia, where 16% of respondents in the several countries surveyed said they made use of crypto. In areas such as Vietnam and the Philippines, the government is already appointing crypto exchange websites as registered remittance and transfer companies. Thus, crypto adoption as one of many legal tenders is not unfeasible. 

El Salvador will therefore have many eyes turned upon its experiment with crypto. Its success could mean an increasingly widespread legalization of cryptocurrency amongst other, developing states, granting them increased stability compared to countries dependent on a Federal Bank controlling the flow of fiat.

Until recently, the laws governing cryptocurrency have been vague. Gains, left unrealised, are non taxable as legal tender and this has provided significant challenges to legal enforcement targeting the flow of dark money. Currently, global law regarding cryptocurrencies is not up to task. They are confusingly regulated, as some states such as China and Pakistan have banned them altogether, while some states tax them as foreign currency and others tax them as a derivative. This lack of clarity must change, and El Salvador will be at the forefront, creating the first definite regulations on Bitcoin. 

There are multiple approaches which could be invoked when creating regulations, from less-intrusive methods such as invoice receipts for taxation purposes, to more intrusive agendas which could force those dealing in crypto to trade on a government platform, allowing no obfuscations of income in bitcoin. Depending on the success of El Salvador’s approach, this will influence possible mainstream adoptions in other countries.

Crypto is still emerging from its shadowed beginnings and volatile presence into its intended purpose: to allow peer-to-peer transactions while avoiding the risks of fiat currency. But El Salvador’s adoption makes it the first to introduce an entire country to a cryptocurrency expressly designed to circumvent state manipulation. This will present significant challenges, mostly in the taxation sphere, but also presents significant gain to a country with no national currency reliant upon tourism and money sent home from foreign workers. El Salvador stands to gain much from this maneuver, and other developing countries will await its results eagerly.