El Salvador has become the first nation in the world to adopt bitcoin as legal tender after congress approved President Nayib Bukele’s proposal to embrace cryptocurrency. Legal tender means that one can freely make payments in bitcoin and more importantly the receiver cannot refuse payments in bitcoin. It can even be used to pay taxes. President Bukele has also announced his plans to mine energy from volcanoes to power the massive data centers needed to mint currency. According to the law, bitcoin will have equal footing with the dollar, which became the country’s official currency 20 years ago.
Let us delve into the whole picture to know the story.
On September 15, 2008, the United States investment banking giant Lehman Brothers Holdings Inc. filed for bankruptcy. The crisis and panic it triggered not only resulted in the loss of thousands of jobs but also resulted in a global financial crisis with many parts of the world plunging into a recession. Just after this, bitcoin was envisaged by Satoshi Nakamoto as a digital currency, a type of money that can be used for transactions on a virtual model. The aim to introduce bitcoin was to create a separate currency or payment system using cryptography without the need for a central bank and banking system.
El Salvador’s experiment will provide analysts to gauge the cryptocurrency impact on an economy. As of now, no specific detail has been given of how this will work and how vendors and businessmen will reflect pricing in real-time. They have mentioned that the exchange rate will be set by the market. The government is guaranteeing convertibility to dollars at the time of transaction through a $150 million trust created at the country's development bank.
Not only this, the president has instructed state-owned geothermal electric firm LaGeo to develop a plan to offer bitcoin mining facilities using renewable energy from the country's volcanoes.
In theory, bitcoin proves to be a quick and easy way to send money across borders. The role of intermediaries like financial firms such as banks and Remittance Companies is eliminated.
Since the announcement made by Bukele, the economy has witnessed quite a stir. From the IMF to many other analysts everyone is raising their concerns regarding the new law.
The IMF raised its concern that the step will cause many legal and economic casualties. A spokesperson from IMF voiced that "Adoption of bitcoin as legal tender raises several macroeconomic, financial and legal issues that require very careful analysis."
Investors believe that bitcoin could catch on in emerging markets. Especially those where people lack access to traditional financial services and require paying costly fees to send or receive money.
Apart from this, the extraction of the currency from cyberspace requires a large amount of energy. According to a report by Bank of America analysts, the global bitcoin industry's overall CO2 emissions have risen to 60 million tons, equal to the exhaust from about 9 million cars.
Other analysts are uncertain whether El Salvador’s move would start a wider trend of bitcoin adoption.
The effects that the new law will create in the economy are yet to be witnessed. If the launch of bitcoin as a currency proves to be successful, it is definite to create a great change in the global economy.
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