El Salvador received a lot of attention when it became the first country to make Bitcoin legal tender. The implications of this are fairly large for the small Central American country.
However, many people forget to mention why El Salvador adopted Bitcoin as a currency. This article will explain exactly why El Salvador made Bitcoin legal tender. We will also explain what this means for the country itself.
Here’s Why El Salvador Adopted Bitcoin
Understanding why El Salvador has embraced Bitcoin requires some understanding of how the El Salvadoran economy functions.
The basics are that El Salvador has a gross domestic product (GDP) of about $27 billion. Remittances from Salvadorans living abroad make up one fifth of the GDP or about $6 billion.
Most of the remittances come from the United States via wire transfer companies like Western Union and MoneyGram.
With that in mind, a major reason El Salvador adopted Bitcoin is to save Salvadorans over $400 million total in fees that they pay for using Western Union and MoneyGram.
Transferring money from the United States to El Salvador is not cheap when using traditional finance like Western Union. On the other hand, the fees for transferring Bitcoin are negligible when using a layer 2 solution like Lightning Network.
To summarize, El Salvador started using Bitcoin to allow citizens to reduce fees they must pay when receiving remittances from abroad. But it goes a little further than that reason alone, which we will explain in the next section.
El Salvador Wants To Become a Bitcoin Mining Hub
An often forgotten aspect of El Salvador embracing Bitcoin is that the country has more plans than just using it as legal tender.
For one, El Salvador gets most of its energy from geothermal sources owned by a state run company. Unfortunately, the geothermal plants are in rural areas away from cities. This means that a lot of electricity is lost transporting the electricity to cities.
Salvadoran President Nayib Bukele has said that Bitcoin miners (and other factories) might be interested in developing mining facilities near the geothermal sites because of the access to cheap electricity.
El Salvador also offers residency to anyone that invests 3 bitcoin into the country. The residency has a path to citizenship after 5 years.
This is a great way to attract Bitcoin miners that were kicked out of China.
So, El Salvador offers a path to citizenship for investing bitcoin into the country combined with offering cheap electricity to Bitcoin miners.
It’s clear that the country is attempting to attract Bitcoin miners. This could be risky if the country decides to nationalize Bitcoin mining companies, but that seems unlikely to occur at this point.
70% of Salvadorans Don’t Have Bank Accounts
Another interesting point with El Salvador is that nearly 70% of the population does not have a bank account. They presumably use cash for all transactions. But it’s expensive to transfer money domestically if one party does not have a bank account.
Bitcoin sort of remedies this because it is extremely easy to set up a Bitcoin wallet. El Salvador was even paying citizens $30 to create their own Bitcoin wallet on the official government wallet app.
El Salvador Uses The US Dollar
A major reason a country like El Salvador would make bitcoin legal tender is that the country does not have its own national currency. Instead, El Salvador uses the United States Dollar as an official currency.
The major problem with this is that the country has no monetary sovereignty. This became a bit of a problem when the United States decided to print 25% of the entire money supply in 2020 due to the COVID-19 pandemic.
Countries that use the US Dollar are collateral damage in that monetary decision. They will face a large amount of inflation and cannot really do anything because, well, the decision comes from Washington DC.
El Salvador does not mention this topic too much, but it is reasonable to assume that the government likely considered this when making the decision. The long term plan may even involve dropping the US Dollar entirely once people become comfortable using Bitcoin for transactions.
How Bitcoin Can Be Used in El Salvador
Bitcoin is now legal tender in El Salvador. This means it has all the same uses as normal money. This includes the following:
- Businesses must accept Bitcoin payments.
- Not strictly enforced, but it is the law.
- Taxes can be paid in Bitcoin.
- No capital gains tax must be paid when selling Bitcoin.
- This also applies to foreigners selling Bitcoin in El Salvador.
- Bitcoin can be used for transfers.
Those are the three primary ways that Bitcoin is used in the country. The biggest, in our opinion, is that foreigners do not pay any taxes when selling their bitcoin.
That will attract a lot of foreigners to the country that want to close out their position. Not to mention that those foreigners can also use their bitcoin to buy goods in the country.
It goes without saying that El Salvador will likely become a big money laundering hotspot. But that has already been fairly common when the country decided to use the US Dollar as the official currency.
What Is The End Game With El Salvador Adopting Bitcoin?
The likely end game with El Salvador adopting Bitcoin likely involves ditching the United States Dollar. The writing is sort of on the wall for the US Dollar with the reckless printing that has occurred over the past two years.
It’s also difficult for a country to function with 3 currencies. The original plan with El Salvador involved using the US Dollar alongside the Salvadoran Colon, but that plan was quickly scrapped and Colons were a
Another sad reality is that El Salvador does have a large crime problem mostly related to the drug trade with the United States. Many have speculated that El Salvador adopted the US Dollar in order to facilitate money laundering within the country.
Anyway, the likely end game of El Salvador adopting Bitcoin is a slow transition from the United States Dollar to Bitcoin, similar to the switch from the Colon to the Dollar. This could be related to El Salvador wanting to launder bitcoin or it could simply be because the US Dollar will likely inflate away all its value.
That covers it for why El Salvador adopted Bitcoin. The surface level reason relates to remittances from the United States to El Salvador.
However, underlying reasons likely include distrust in the future of the US Dollar combined with encouraging more citizens to adopt digital banking of some sort. Another reason possibly includes to facilitate money laundering in a country rife with money laundering from gangs and the government itself.
All things considered, the adoption of Bitcoin by El Salvador is likely a net positive for the future of the cryptocurrency and the health of the country. It may come to the point that Salvadorans become extremely wealthy if the price of Bitcoin rises significantly in the future.