The green shadow cast by the U.S. dollar on developing countries is being lifted. In El Salvador, it's now approaching high noon.
Growing up in El Salvador during its civil war, I never thought I would witness my home country filled with so much hope for the future, let alone leading the way for others. The government's recently passed law making bitcoin legal tender is set to take effect on September 7 — making it the first country in the world to do so.
The catalyst behind the bold move is El Salvadorian President Nayib Bukele, a forward-thinking, entrepreneurial-spirited leader who has created a template for other countries like Paraguay, Mexico, Panama and Venezuela to follow. Bukele is the first president elected outside of the two main parties since the civil war, the youngest president in history (at 37 years old) and he won on a platform of modernization. Bukele is keeping his streak of firsts alive by illuminating how bitcoin can transform the country’s financial system for the better and by showing a path for other countries with emerging economies to get out from under the USD's shadow.
A Brief History Of Currency In El Salvador And Why Bitcoin Is Supreme
Today, El Salvador doesn't have a national currency.
The colón, named after Christopher Columbus, was El Salvador's currency but was abandoned in 2001 for the U.S. dollar. The purpose was to curb inflation and increase trade with the U.S., a significant trading partner. The tendency of developing countries to borrow in USD rather than their own currencies is sometimes called "original sin," because it reflects the fact that their currency is less accepted globally. Borrowing in USD enables developing countries to pay for essential goods that would otherwise be unaffordable. This concept, known as dollarization, happens when a country's currency loses its usefulness as a medium of exchange, due to hyperinflation or instability.
Cryptocurrency represents the modernization of democracy and levels the playing field for the underserved. El Salvador's adoption of bitcoin as legal tender gives hope to the people who need it most, not just in El Salvador but also in the entire region.
By adopting bitcoin as legal tender, El Salvador is betting that, in time, bitcoin will be:
- More accepted globally
- A deflationary medium of exchange
- A launchpad for El Salvador's economic development
It has long been a challenge in El Salvador to develop new growth sectors for a more diversified economy. Bitcoin is a progressive route to accomplish that goal by providing a sanctuary state to attract talent and increase GDP. For instance, as part of the law, President Bukele is incentivizing foreigners to gain permanent residence in El Salvador if they invest 3 BTC into the country.
Bitcoin Can Fix Remittances And Banking
Bitcoin will work better as a legal tender for several reasons.
El Salvador depends heavily on remittances, which make up 21% of its GDP, the second-highest of any country in the Western Hemisphere. Bitcoin can facilitate remittances by working with or removing intermediaries and reducing the costs of overseas payments. Many critics of this approach reference high fees associated with the Bitcoin network that make remittances impractical, but they're ignoring the Lightning Network.
For example, sending a $10 payment within the Lightning Network would cost one satoshi (the smallest unit of a bitcoin, equivalent to 100 millionth of a bitcoin) to complete the transaction in one second. Other critics reference the difficulty in sending and receiving bitcoin. But take it from me, I sent bitcoin to my mother in El Salvador recently without a glitch. If my mother, who is in her 80s, can do it, so can anyone.
In El Salvador, 70% of the population is without bank accounts. The unbanked face tremendous challenges in saving and wealth accumulation. They must also work in the shadows because they are locked out of the main stream of the local economy, often leading to exploitation. By adopting bitcoin, they are gaining access within the local economy and beyond it, globally.
A New Era For Bitcoin Mining
It's no mystery that El Salvador is a developing country in search of economic growth. In the past, El Salvador produced gold and silver, but attempts to reopen the mining sector collapsed after the former president, Antonio Saca, shut down the operations of Pacific Rim Mining Corporation in 2009.
With the emergence of the new "mining" sector and the charge for the bitcoin mining community to institute more renewable energy standards, President Bukele is looking into using geothermal energy from volcanoes.
This same entrepreneurial, fast-moving approach is also exhibited in the United States from the likes of Francis Suarez, the mayor of Miami, creating a sort of cryptocurrency hub. In fact, a growing number of government leaders are using this method with the intention of attracting entrepreneurs which, in so doing, boosts the economy.
Bitcoin’s Obstacles Around The Bend
As with any change in law, especially in adopting a new tender, there will be challenges. Think of what it took for the U.S. dollar to get to where it is today. It took six decades, war and controversial bait and switch tactics. The adoption of bitcoin won't be flawless, but it will be peaceful, transparent and immutable.
Bitcoin is still in its maturation phase and the entire world is still trying to understand it, which takes time. Education is paramount.
Because bitcoin is a digital currency, it requires digital compatibility adjacent to it. As of 2017 (the most recent survey available), only 37.1% of El Salvador’s population owned smartphones, underscoring one portion of the large technological gap in need of a bridge.
Although El Salvador is taking a bold risk, its asymmetrical benefit of adopting bitcoin as legal tender can change the world for the better. One thing is certain: The world is watching El Salvador. How many times in your life has that been true?
This is a guest post by Mario Gomez Lozado. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.