El Salvador is the first country to make Bitcoin a legal currency
Lesson summary
Hi there everyone, it’s Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics, all, as you can hear, at the right speed for you, the English learner. JR is the producer, and he has uploaded the full lesson to PlainEnglish.com/406.
Coming up today… El Salvador has adopted a cryptocurrency as legal tender alongside the U.S. dollar, which it has been using since 2001. We’ll talk about the rollout and the range of opinions on the matter. The expression we’ll review today is “stretched thin” and we have a quote of the week from Jimi Hendrix.
Bitcoin is legal tender in El Salvador
Bitcoin was created in 2009 to be an alternative, electronic currency, free from any type of government control or interference. It’s not controlled by any one central authority, but by a transparent and supposedly un-hackable ledger called a blockchain. It’s decentralized, anonymous, and free from any form of government control.
El Salvador is a small, poor Central American country of 6.5 million people. About 45 percent of the population has access to the Internet, which is often spotty; in rural areas, that figure is only ten percent. El Salvador’s economy is primarily cash-based: 70 percent of Salvadorans don’t have a bank account or a credit card. Their financial lives are simple. They pay and get paid in cash; El Salvador has used the U.S. dollar as its official currency since 2001. Salvadorans like it because they trust the U.S. dollar and their currency is stable.
So, what is El Salvador doing adopting Bitcoin as an alternate legal currency?
The short answer is that this is a risky bet being placed by the country’s wildly popular, unconventional, 40-year-old president Nayib Bukele. There is an optimistic and a pessimistic view of what’s going on.
But before we get to that, how did this happen? At a cryptocurrency conference in Miami on June 5, Bukele announced in a video message that he would be sending a bill to Congress that would make Bitcoin an official currency. The announcement took a lot of people by surprise, not the least everyone in El Salvador. Bukele first made the announcement in English, not in Spanish, and he told a crypto conference, not Salvadorans. Business leaders, including banks, in El Salvador, were not consulted. Economists in El Salvador didn’t know what to think.
Bukele sent a bill to Congress on June 6. By June 9, Congress had passed it. The bill gave the country just 90 days to become the first country in history to adopt a cryptocurrency as legal tender. On September 7, the law went into effect.
What does it mean to be legal tender? It’s the currency in which debts can legally be settled. In El Salvador, as of now, they have two forms of legal tender; any debt can now be legally paid in either Bitcoin or U.S. dollars. That means taxes, wages, loans, bills, anything can be paid either in dollars or in Bitcoin.
But the Bitcoin law goes farther than just making the cryptocurrency legal tender; it requires merchants to accept Bitcoin for purchases, as long as they have the technology to do so. That means Starbucks, McDonald’s, and other smaller merchants all now must have a bitcoin payment option.
The opinions about this range from good, to bad, to ugly. Let’s start with the good. About twenty percent of El Salvador’s economy is based on remittances from abroad. That means people send money from the United States, Europe, and other countries, back to their friends and relatives in El Salvador. To do so, they often pay exorbitant money-transfer fees to places like Western Union . As a result , Salvadorans lose a large percentage of their incoming money to these fees. The new crypto wallets sponsored by the Salvadoran government will reduce the costs.
There are other potential benefits. The new system will make day-to-day payments easier for those who are digitally connected and it will bring some people into the formal banking sector and out of the shadow, cash-based economy while possibly attracting more foreign investment.
Now for the bad. Cryptocurrency is famously unstable. In the past year, a single Bitcoin has ranged in value from $10,000 to $63,000. It’s not typically used as a means of exchange because its value is so unpredictable. That’s one reason why so few things are available to buy in bitcoin: you don’t know what it’s going to be worth from one day to the next. This could lead to wild swings in the price of goods and services. People in El Salvador, already stretched thin , don’t have the financial cushion to accept unpredictable changes in the value of their money. The government says it will facilitate the conversion of bitcoin to dollars with a reserve fund. However, if the swing in value is big enough, the reserve fund could be overwhelmed. Plus, the average Salvadoran won’t monitor the price daily and actively manage a currency portfolio.
Bitcoin is good for paying for certain things, however. Ransom payments and money laundering are both excellent use cases for cryptocurrencies because they are anonymous, and they avoid the international banking system and its “Know Your Customer” regulations. El Salvador could become the new world headquarters for money laundering, kidnapping, and ransomware attacks. Anyone who earned bitcoin from ransomware , for example, could legally exchange the bitcoin for US dollars in El Salvador, no questions asked, and spend those dollars in Miami, New York, London, or wherever they like.
Finally, the ugly. Dollarization is popular in El Salvador because it brought the price and economic stability. But Bitcoin could be the opening gambit for reversing dollarization by stealth means. Once enough people are using the digital wallet, the government could stop converting bitcoins to U.S. dollars and adopt its own digital currency that’s worth less. If Bukele gets the payment infrastructure right, this will be easy to do and there won’t be much that Salvadorans can do to stop it.
Most likely outcomes: bad and ugly
This is going to be a disaster. There are plenty of ways to get people out of the cash economy without adopting a cryptocurrency. Latin America has an active market of new financial technology companies, including payment apps, that are innovative, low-cost, and easy-to-understand. There are already cheaper ways to send money abroad than Western Union. The dollar is popular in El Salvador and it’s stable.
The new president is trying to be like Elon Musk—a high-tech global celebrity. He certainly got that. But he’s betting his small, poor country’s entire economy on a volatile currency that no other country has adopted.
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