CoinDesk Global Policy and Regulation Managing Editor Nikhilesh De explains the significance and potential ripple effect of El Salvador officially adopting bitcoin as legal tender.
SAN SALVADOR, El Salvador (AP) — El Salvador's Legislative Assembly has approved legislation making the cryptocurrency Bitcoin legal tender in the country, the first country to do so, just days after President Nayib Bukele made the proposal at a Bitcoin conference.
The digital currency can be used in any transaction and any business will have to accept payment in Bitcoin, with the exception of those lacking the technology to do so. The U.S. dollar will also continue to be El Salvador's currency and no one will be forced to pay in Bitcoin, according to the legislation approved late Tuesday.
"Every restaurant, every barber shop, every bank....everything can be paid in U.S. dollars or Bitcoin and nobody can refuse payment," Bukele said in an hour-long social media hangout with thousands of U.S.-based Bitcoiners as the bill was being debated Tuesday night in El Salvador's congress.
People are also reading…
The exchange rate between the two currencies will be established by the market and all prices will be able to be expressed in Bitcoin — though for accounting purposes, the dollar will continue to be the currency of reference.
The government will promote training for people to be able to carry out transactions using Bitcoin.
The Economy Ministry noted that 70% of Salvadorans do not have access to traditional financial services and it said the country "needs to authorize the circulation of a digital currency who value exclusively follows free market criteria" to stimulate growth.
"The Bitcoin law is ambitious, but simple," Bukele said on Twitter. "Furthermore it is well structured to have zero risk for those who do not want to take risks. The government will guarantee the convertibility to the exact value in dollars at the moment of the transaction."
El Salvador's President Nayib Bukele delivers his annual address to the nation before Congress in San Salvador, El Salvador, on June 1, 2021.
The law would create mechanisms to help Salvadoarans, especially small businesses, quickly convert payments they receive in Bitcoins into dollars -- helping them avoid the risk of the value plummeting, as it has in recent days
"They have to take the Bitcoin, but they don't have to take the risk," Bukele said. "We might earn some money or we might lose some money, but it doesn't matter. The purpose of the trust fund is not to make money but to support making Bitcoin a legal tender."
Additionally, Bukele said that anyone who invests three Bitcoin in El Salvador—currently about $105,000— will be entitled to permanent residency.
Bukele said he would discuss his plans with the International Monetary Fund on Thursday. He denied that the move was an attempt to de-dollarize the economy.
"The objectives of having the U.S. dollar as legal tender are replicated on steroids with Bitcoin," he said. "It's going to help having both currencies as legal tender."
The law will take effect 90 days after its official publication. The Central Bank and financial system regulators will publish the implementing rules in the interim.
Bukele's New Ideas party holds a supermajority in the new congress seated May 1. On its first day it ousted the justices of the Constitutional Chamber of the Supreme Court and then replaced the Attorney General, leading to concerns from the United States and others about Bukele's concentration of power.
Other countries in the region, including Venezuela and the Bahamas, have introduced digital currencies, though none had adopted the original cryptocurrency, Bitcoin, itself.
Bitcoin, intended as an alternative to government-backed money, is based largely on complex math, data-scrambling cryptography — thus the term "cryptocurrency" — lots of processing power and a distributed global ledger called the blockchain, which records all transactions. No central bank or other institution has any say in its value, which is set entirely by people trading Bitcoins and which has wobbled wildly over time.
Bitcoin and other popular digital currencies, including Ethereum and Dogecoin, all fell sharply on Wednesday according to the tracking site Coindesk. Bitcoin, which climbed above $60,000 early this year, slid 7% to $32,690.
The legislation established a government trust fund that will guarantee the automatic convertibility to dollars.
Carlos Carcach, a profesor at El Salvador's Superior School of Economics and Business, argued that adoption of Bitcoin as legal tender "is not necessary, nor convenient," though he added, "as long as there is someone who accepts payment with Bitcoin, the same as they accept dollars, there wouldn't be problems."
He noted that Bitcoin is extremely volatile, so investors "run the risk of becoming rich and the next day being poor."
Opposition lawmaker Rodrigo Ávila of the conservative Arena party complained that the legislation was not sufficiently discussed by the Legislative Assembly before passage. There was no testimony from economic or cybercrime experts.
U.S. officials have said Bitcoin was used to pay the ransom in the cyberattack of Colonial Pipeline that caused the operator of the nation's largest fuel pipeline to halt its operations last month.
El Salvador's move rekindled memories of the Nov. 30, 2000, decision to dollarize El Salvador's economy, an action taken in the middle of the night by the Arena-controlled congress.
El Salvador received some $6 billion in remittances from Salvadorans living abroad last year, about 16% of the country's gross domestic product. Bukele has said Bitcoin could eliminate the costs of sending that money home.
"This is not something for rich people only. It's for everybody," said the 39-year-old Bukele, whowaxed philosophically about the power of cryptocurrency to loosen the control of central banks and empower young entrepreneurs.
"We build our own future. So why do we have to resign ourselves to a dystopic future?," he said, adding that he's enjoying the moment without fully understanding the shift in international finance his tiny homeland may have triggered. "This will be a huge gamechanger not for El Salvador but for the world. It's beautiful to be part of a huge change in humanity."
__
AP writer Joshua Goodman in Miami contributed to this report.
These were the most-searched financial planning questions of 2020
10. What is a 401(k)?
Google searchers were curious about their retirement options in 2020, with “What is a 401(k)?” coming in as the 10th most-searched financial planning question of the year. In 2020, 401(k) accounts saw an increase in contributions, with the average IRA balance reaching $128,100, 11% higher than the average balance of $115,400 in 2019, according to a study from Fidelity.
9. Is a 401(k) an IRA?
Last year, Google users wanted to make sure they understood how a 401(k) differs from an Individual Retirement Account (IRA). In 2020 alone, the number of IRAs receiving contributions increased 35%, according to Fidelity's research.
8. What is a 1099-R?
People also wanted to get a handle on tax forms during the pandemic. Searches for “What is a 1099-R?” came in at No. 8 on Google’s list of the top questions about financial planning in 2020. A 1099-R form lists each person to whom an individual has made a distribution of $10 or more from a profit-sharing or retirement plan like an IRA.
7. What is a SEP IRA?
Another one of the most searched financial questions last year was, “What is a SEP IRA?” A Simplified Employee Pension (SEP) IRA allows business owners to set up their own Individual Retirement Accounts or Annuities, while contributing to those of their employees. A SEP IRA follows the same investment and distribution rules as a traditional IRA.
6. What is the maximum 401(k) contribution for 2020?
Google users were determined to make the most of their retirement savings during the tumultuous year that was 2020. The maximum contribution for 401(k)s in 2020 increased to $19,500 from $19,000 in 2019. This increase applied to 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan. Catch-up contribution limits also went up from $6,000 to $6,500 last year.
5. How much should I save for retirement?
Continuing the trend of preparing for the future, “How much should I save for retirement?” came in as the No. 5 most-searched question. While the guidance for how much a person should save for retirement may vary, it’s best to base it on your current age, your desired retirement age and how much income you’d like to bring in monthly once you are retired, according to Merrill Lynch.
4. What is a health savings account?
Google users were curious about their health coverage options in 2020 as well. Health Savings Accounts (HSAs) can be particularly attractive for people because you can contribute to them even when you are not working. Health savings account mutual investment fund Devenir found that during the year 2020, HSA asset growth grew 25% year-over-year in assets held and health savings accounts grew 6% to over 30 million total accounts in for the period ending Dec. 31, 2020.
3. How to withdraw from a 401(k)?
During the pandemic, Google users were considering dipping into their retirement savings to protect their finances. The CARES Act, which passed in March 2020, removed the 10% penalty for early withdrawals from retirement accounts from anyone under the age of 59½. A Fidelity study showed that between March 2020 and January 2021, around 1.6 million individuals took out savings from their 401(k) plans under the CARES Act.
2. When can I retire?
Some Google users wanted to know how much longer they'd have to put in their 40 hours a week at a regular job. When to retire is an individual decision based on many factors including age, financial situation and career prospects. The U.S. Census Bureau notes that the average American retirement age is 65 years old, but a 2008 study by the bureau noted that people may choose to work beyond retirement age due to the high cost of health care and increased life expectancy as well as for their mental and social well-being.
1. How much do I need to retire?
The No. 1 financial question people were searching for on Google in 2020 was, “How much do I need to retire?” According to finance and investing website Don’t Quit Your Day Job, the median retirement savings for 2020 was $6,450.00 per household with people 65 and older saving between $25,000 and $32,0000 per household.
