The El Salvador Behind Bitcoin Becoming Fiat: Is Bitcoin the Answer or the Problem?

Amidst skepticism and praise, El Salvador has become the first country in the world to make bitcoin a fiat currency.

The El Salvador Behind Bitcoin Becoming Fiat: Is Bitcoin the Answer or the Problem?

Amidst skepticism and praise, El Salvador has become the first country in the world to make bitcoin a legal tender. on June 9, the President of the Republic of El Salvador, Nayib Bukele, tweeted that a bitcoin bill was officially presented to the country’s legislative assembly, and the bill was passed by an overwhelming majority vote. El Salvador became the first country in the world to recognize bitcoin as legal tender.

Behind this radical monetary experiment is a risk taken by the young president of El Salvador, a Central American country under the pressure of a perennial high murder rate, high debt and high poverty rates.

A country of “three highs”
El Salvador is located in the north of Central America, with an area of just over 20,000 square kilometers, equivalent to 1.2 Beijing, and a total population of about 6.7 million, a third of Beijing’s resident population.

Historically, El Salvador was once the home of the Indo-Americans. Later, due to the long-term colonial occupation, El Salvador has been a relatively multi-ethnic, multi-lingual and multi-faith country with a turbulent political atmosphere, which has led to the economic development in the country has been very sluggish. Many people have taken the path of crime in order to survive.

El Salvador has a large number of gangs in the country, and in January 2015, the country’s president announced a major crackdown on street gangs, but 3,400 people were still murdered between January and July.

El Salvador has one of the highest murder rates in the world.

The website of the Chinese Embassy in Saldova had reminded Chinese citizens in Saarland in 2019 that “the security situation in Saarland is unsettled and there are more cases of theft and robbery.”

El Salvador is mainly agricultural and has a weak industrial base. Economic growth has been slow in recent years due to the impact of the international economic and financial crisis.

The sudden epidemic in 2020 has made the already fragile Salvadoran economy even more vulnerable.

According to the latest report “Central America: The Impact of the New Coronavirus Epidemic on Fiscal Accounts and Public Debt Levels” released by international rating agency Moody’s, El Salvador is one of the countries under the greatest fiscal stress in Central America under the epidemic.

Data released by the Economic Commission for Latin America and the Caribbean for the period January to September 2020 show that, among the 12 countries surveyed in Latin America, El Salvador has reached a fiscal deficit rate of 8.1%, second only to Brazil’s 12.3%.

The International Monetary Fund predicts that in 2021, the Salvadoran government is the second most indebted country in Latin America, after Brazil.

The Salvadoran Foundation for Economic and Social Development released a report showing that the country’s poverty rate will rise from 31% to 41% in 2020, with poverty becoming more widespread, due to a series of effects brought on by the new crown pneumonia epidemic.

The foundation said it estimates that some 225,000 people will be unable to find work, a deterioration in social welfare not seen in 40 years, and that the country’s economic recovery will be “very slow.

In the face of the worst situation in 40 years, Bouclay is counting on cryptocurrencies.

The young president’s adventure
President Boukry, who is driving this cryptocurrency experiment, ran for office on February 3, 2019, on behalf of the Grand Alliance for National Unity, and was elected president with more than 53% of the vote, taking office on June 1 of that year at the age of 37.

Born in San Salvador and of Palestinian descent, the “80-year-old” Bouclé was elected mayor of Nueva Cascutlán in 2012 on behalf of the Marti Front and mayor of San Salvador in 2015.

In October 2017, he formed his own “New Thought Party” and announced his candidacy for the 2019 presidential election. In July 2018, he ran as a candidate for the Grand Alliance for National Unity, the third largest party in Congress, because the New Thought Party did not complete the registration process on time.

Early in his term, Bouclé fired the attorney general and five other corrupt magistrates. And in just one month, the Salvadoran Congress approved new education and infrastructure financing plans and passed bills to ensure that business elites who had bought politicians in the past were restrained.

In Bouclé’s view, the state has an obligation to promote and protect private enterprise and to create the conditions necessary to increase the country’s wealth for the benefit of the broadest possible population. The state has an obligation to promote the financial inclusion of its citizens in order to better safeguard their rights.

The designation of Bitcoin as a fiat currency is a new attempt by the young president to save the country’s economy.

According to Buclay, “In order to promote the country’s economic growth, it is necessary to approve the authorization of the circulation of a digital currency whose value is fully compatible with the standards of the free market, in order to increase the wealth of the country and benefit the greatest number of its inhabitants.”

Before 2000, El Salvador used to have its own circulating currency, the colón, but the monetary system eventually collapsed due to severe inflation.

The U.S. dollar was adopted as legal tender under Legislative Decree No. 201, Volume 349, Government Gazette No. 241, published on Dec. 22, 2000.

According to the Central Bank of El Salvador, 90% of the currency in circulation today is the U.S. dollar, and the colón has been virtually abandoned to the wayside.

By officially legalizing Bitcoin, Buclay hopes to stabilize El Salvador’s economy. To attract investment, Buclay also said that El Salvador will grant permanent residency to immigrants who invest 3 bitcoins (about $102,000).

Is Bitcoin the answer or the problem?
The contents of the Salvadoran Bitcoin bill indicate that its purpose is to regulate Bitcoin as an unrestricted legal tender, with the power to circulate freely and without restrictions in any transaction carried out between public or natural or legal persons.

The exchange rate between bitcoin and the U.S. dollar will be freely determined by the market; prices can be denominated in bitcoin; taxes can be paid in bitcoin; bitcoin transactions will not be subject to capital gains tax, just like any legal tender; for accounting purposes, the U.S. dollar will be used as a reference currency; and every economy, when offered bitcoin for payment by the person obtaining the goods or services, must accept it.

In addition, the state will advance the necessary training and mechanisms to enable people to be able to transact in bitcoin. The executive branch will establish the necessary institutional structures to implement this law.

According to Bouclay, making Bitcoin legal tender will, in the short term, create jobs and provide financial services to people outside of the main economy. El Salvador is still a cash-based economy, with about 70 percent of the population without bank accounts or credit cards and without access to traditional financial services.

Remittances from Salvadorans working abroad currently account for a large part of the country’s economy, equivalent to roughly 22 percent of the country’s GDP. Officials report that remittances to the country total $5.9 billion in 2020. International transfers typically charge fees of 10 percent or more, and the use of bitcoin can prevent “millions of dollars in lost money” from being sent.

Although El Salvador became the first country in the world to establish bitcoin as legal tender, uncertainties remain about the future of bitcoin in El Salvador.

The Bitcoin network has been congested in recent years, has reached its maximum capacity to handle on-chain transactions, and its transaction fees, which can run into the tens of dollars, are clearly unaffordable for most Salvadorans.

During the Bitcoin 2021 conference in Miami, Bouclay announced that El Salvador has partnered with Strike, a lightning network payment platform, to build the country’s modern financial infrastructure using Bitcoin technology.

The Lightning Network is a second layer payment protocol that runs on top of the Bitcoin network, allowing for instant transactions and affordable transaction fees. In March, Strike launched its mobile payment app in the country, which quickly became the most downloaded app.

Additionally, Bitcoin’s fiat currency status is closely tied to the stability of Bucclei’s personal political career. Under the country’s law, Naib Boukry, who takes office in 2019, is in office until 2024 and is not eligible for re-election.

Wang Yongli, former deputy governor of the Bank of China, argued in a media interview that some countries lacking sovereign currencies lack the most basic knowledge of currency, and that using fully decentralized digital crypto assets such as Bitcoin as legal tender will surely seriously disrupt economic and social operations due to its own price ups and downs, and that the state has no means of regulation, which is only self-defeating.

He stressed that El Salvador’s claim to use Bitcoin as legal tender is heartening to the cryptocurrency community, but it may be that expectations are simply too high.

Posted by:CoinYuppie,Reprinted with attribution to:
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