The flagship crypto-asset posted impressive gains in the mid-week trading session after it became official that El Salvador becomes the first country in the world to formally adopt Bitcoin as legal tender.
President Nayib Bukele, whose Twitter profile has the “laser eyes” picture popular with devotees of the pioneer Crypto, further disclosed via Twitter that lawmakers approved the legislation by a supermajority, securing 62 out of 84 possible votes to adopt the landmark proposal.
What this means
Bitcoin will become the legal tender in 3 months, meaning that every business operating in the Central American country must accept Bitcoin for goods and services, alongside the greenback.
It is important to note that the Crypto law is well structured to input zero risks for those who do not want to be exposed to Bitcoin’s volatility as the central government will guarantee the convertibility to the exact value in dollar terms at the time a transaction was made.
It comes as no surprise that a country with a population of about 6.5 million and a history of currency instability is fast adopting Crypto.
Recall that some years ago, El Salvador replaced the Salvadoran colón with the greenback especially because of its large exposure to international trade with major oil exporters like Saudi Arabia and Qatar, coupled with having strong ties with the United States as regards tourism.
The overbearing reliance on the U.S dollar comes with a heavy cost as the COVID-19 pandemic weakened growth in the country’s tourism sector coupled with the massive quantitative easing program taking its toll on the small country. The Central American nation whose banks do not receive infusions from the U.S Federal Reserve Bank did lose a considerable amount of purchasing power due to U.S. monetary inflation reaching a record high.
Why El Salvador’s Bitcoin adoption matters
The 39-year-old president also highlighted the growing importance of Bitcoin in remittances and payments in the global financial system. Considering that a majority of Salvadorans do not have bank accounts, providing easier transfer options for remittances from abroad (which makes up around 20% of the country’s GDP) had become pertinent.
Market commentators further reveal that El Salvador was increasingly left with fewer choices but to take actions that could harm the nation’s economic stability, so going with Bitcoin was a no brainer, on the bias it has no central authority governing it, coupled with its finite supply and suitability against fiat inflationary problems.
Additionally, the Central American president also announced permanent residency to any foreign citizen who invests three Bitcoin in El Salvador.
A significant number of economic experts anticipate that a handful of crypto millionaires moving to El Salvador could transform the country. The nation posted a 2020 fiscal deficit of 10.1% of GDP while revenues fell just 6% in absolute terms but actually increased in terms of GDP given the economic contraction, according to data collated from Fitch ratings.