It Is a Big Step for El Salvador to Adopt Bitcoin As a Legal Currency, But Why?

In an advanced step, the President of El Salvador, Najib Abu Kila, announced that Bitcoin was approved as legal currency in his Central American country, becoming the first country to “officially” accept the digital currency as legal currency.

On June 9, 2021, Abu Kila explained that the market value of Bitcoin is $680 billion. If the government invests just 1 percent, this would increase GDP by 25 percent, in addition to the possibility of reaching 10 million new Bitcoin users.”

The British Independent newspaper says in its Turkish edition: "The Abu Kila party achieved a landslide victory in the 2019 presidential elections, and became the first Salvadoran president to win without the support of the main parties in the past 30 years."

Although he has promised to end gang violence in the country and he recently dismissed five Supreme Court justices and prosecutors, he faces accusations of authoritarianism and corruption.

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Author Husam El Din Aslan said: At least 20 percent of El Salvador's population of 6.5 million live outside the country and most of them work in the United States of America.

In other words, payments may  be delayed a few days. So, bitcoin is expected to be a solution to these money transfer problems.

The commission collected from remittances sent from expatriate Salvadorans is about 20 percent of the country's internal product.

 Thus, Abu Kila collects the transfer commissions received by more than one million low-income families, the equivalent of billions of dollars from them each year.

 With Bitcoin, we don't know who will get the transfer commissions and brokerage services. However, according to Abu Kila, it "will remain for the people." Jack Mallers, founder of the Bitcoin payments platform Strike, stated that he worked on writing Salvadoran legislation that would legalize the currency and help with the state to develop cryptocurrency infrastructure.

However, with the spread of cryptocurrency, concerns are growing about the damage that Bitcoin could cause.

He explained this by saying: Although the cryptocurrency economy in Latin America is one of the most heavily traded markets, the region showed the second lowest growth rate last year.

There are many companies that avoid import taxes by using cryptocurrency.

However no one trusts the volatile market and many people are still completely unaware of the existence of these alternatives or their risks, there is a lack of awareness.

The adoption of cryptocurrencies in Latin America has become random, not because of the technological and economic anarchists of the modern era, but because the people that want to secure their financial freedom by any means, says the Turkish writer.

He adds that cryptocurrencies have a long history of hacking. Its widespread circulation in Salvador could turn the latter into a breeding ground for tax swallowing and money laundering, making it the inevitable arena of illegal business for the mafia and organized gangs.

The Other Face

Abu Kila's announcement of the decision to legalize Bitcoin was met with great enthusiasm in the international crypto market 

While some Salvadorans are enthusiastic about the idea of ​​Bitcoin as legal tender, others are concerned that it will simply become a tool for corrupt authorities.

In this context, the Salvadoran economy suffered its deepest collapse in 40 years, in 2020, and the fiscal deficit increased by more than 10 percent of GDP due to the total closure and curfew. 

This prompted the government to search for new sources of funding.

That is why Abu Kila plans to build a bitcoin mining center by using renewable energy from volcanoes in the country. El Salvador lost 36.6 percent of its net international reserves between March 2020 and the same month of 2021, while its two neighboring countries: Guatemala and Honduras raised their reserves.

Hence, foreign currency reserves are depleted as the government withdraws funds before there is enough to replenish the reserves through direct investments or transfers. 

The truth is that Abu Kila has no other ways to earn money to run the country except from remittances.

Although there are about 6 million people living in Salvador, there are about 9.5 million mobile connections, which means that only 34 percent of the population has access to the Internet.

On the other hand, the data platform “Statista” revealed the number of cryptocurrency users.

It is interesting that the most developed countries, such as the United States, Britain and France, were at the bottom of the list, while Latin America topped the list as the countries with the largest number of cryptocurrency users in the world, including Brazil, Colombia, Argentina, Mexico and Chile.

 

A Necessity

After El Salvador announced its decision, politicians from Paraguay, Panama, Brazil, Mexico and many countries wanted to pass the same laws to reduce dependence on the dollar, slow inflation, and increase financial participation.

According to an article in Sound Sand Colors, “In 2020, Latin countries sent $25 billion of cryptocurrency and received $24 billion, which is 9 percent of all cryptocurrencies in the world.”

On the other hand, it adds, at least 50 percent of the Latin American population does not have access to banks, according to the World Bank.

 This forces many people to look for other ways to protect their money. In Latin America, 113 million people use credit cards, while 387.2 million people are expected to have an internet connection. 

Therefore, using the Internet is easier and more common than obtaining a bank account. Hence, people are getting more and more access to cryptocurrency instead of opening a bank account.

Especially since it is difficult for many people in Latin American countries to get a bank account because they do not work full time because it is necessary to open an account. Even if they work part-time for a company like Uber, they can't get their money back if they don't have a bank account. 

Since they need to keep their money somewhere, they turn to cryptocurrencies. People also invest their money in cryptocurrencies because they have a better value than the local currency, and they are looking for platforms that protect them from the damage caused by inflation that directly affects the local currency.

As a conclusion, the popularity of Bitcoin technology in Latin American countries is a result of necessity, rather than a luxury.

The writer concluded his article by saying that the adoption of Bitcoin as a digital currency is more about collecting the full commission from transfers than providing technological convenience to the people.