El Salvador Becomes First Nation to Make Bitcoin Legal Tender
The digital currency can be used in any transaction and most businesses will have to accept payment in Bitcoin. The U.S. dollar will continue to be El Salvador’s main currency.
President Nayib Bukele on Sunday. “Everything can be paid in U.S. dollars or Bitcoin and nobody can refuse payment,” he said.Credit...Jose Cabezas/Reuters
SAN SALVADOR, El Salvador — 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, except those lacking the technology to do so. The U.S. dollar will continue to be El Salvador’s main 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,” Mr. Bukele said in an hourlong social media hangout with thousands of U.S.-based Bitcoiners as the bill was being debated Tuesday night.
The exchange rate between the two currencies will be established by the market. The dollar will continue to be the currency of reference.
The Economy Ministry noted that 70 percent of Salvadorans do not have access to traditional financial services and that the country “needs to authorize the circulation of a digital currency whose value exclusively follows free market criteria” to stimulate growth.
The law would create mechanisms to help Salvadorans, 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.
El Salvador To Use Volcano Power For Bitcoin Mining
Precioussss. Image Credit: Dim Dimich/Shutterstock.com
Earlier this week, the small Central American republic of El Salvador went down in history as the first country in the world to accept Bitcoin as legal tender.
Now, in a move that sounds straight out of a Bond film, President Nayib Bukele has announced an innovative plan to capitalize (get it?) on the new national currency: volcanoes.
In a tweet posted within hours of the country’s adoption of the cryptocurrency, Bukele told the world that he had instructed the head of the state-owned geothermal electric company to set up facilities for volcano-powered Bitcoin mining.
El Salvador may be the smallest country in Central America, but it is one of the world champions of geothermal energy production. That’s because it sits right in the middle of the Central American Volcanic Arc: a 1,500-kilometer-long (930 miles) chain of hundreds of volcanoes that stretches all the way from Guatemala to Panama. By harnessing the thermal energy of its 23 active volcanoes, El Salvador is able to renewably produce around one-quarter of its national power consumption through steam-powered turbines.
That’s important because energy consumption is a big problem with Bitcoin. To obtain the cyber currency, computer users must “mine” it – in other words, they use the processing power of their machines to solve complex math problems. These solutions are used to verify previous transactions, and some Bitcoin is created on the side for the miner.
But unlike normal money, there’s a limited amount of Bitcoin – once it’s all been “mined”, that’s it, no quantitative easing or inflation allowed. And that is why the price has skyrocketed recently, resulting in graphics cards, and pretty soon a whole lot of other things, going extinct. In terms of countries, Bitcoin mining is now responsible for more power consumption than Argentina, and it’s catching up on the Czech Republic.
While this environmental impact is alarming, not everybody is convinced, with many Bitcoin fans saying that the currency’s popularity will reinvigorate renewable energy technology. El Salvador’s planned volcano mine, which comes only a couple of weeks after the creation of the Elon Musk-blessed Bitcoin Mining Council, is one hopeful hint that they may be right.
“Our engineers just informed me that they dug a new well, that will provide approximately 95MW of 100% clean, 0 emissions geothermal energy from our volcanos,” Bukele tweeted, along with a video which he said was a jet of pure water vapor being ejected from a pipeline. “Starting to design a full #Bitcoin mining hub around it.”
The rise of e-moneyThe digital currencies that matter
Get ready for Fedcoin and the e-euro
TECHNOLOGICAL CHANGE is upending finance. Bitcoin has gone from being an obsession of anarchists to a $1trn asset class that many fund managers insist belongs in any balanced portfolio. Swarms of digital day-traders have become a force on Wall Street. PayPal has 392m users, a sign that America is catching up with China’s digital-payments giants. Yet, as our special report explains, the least noticed disruption on the frontier between technology and finance may end up as the most revolutionary: the creation of government digital currencies, which typically aim to let people deposit funds directly with a central bank, bypassing conventional lenders.
These “govcoins” are a new incarnation of money. They promise to make finance work better but also to shift power from individuals to the state, alter geopolitics and change how capital is allocated. They are to be treated with optimism, and humility.
A decade or so ago, amid the wreckage of Lehman Brothers, Paul Volcker, a former head of the Federal Reserve, grumbled that banking’s last useful innovation was the ATM. Since the crisis, the industry has raised its game. Banks have modernised their creaking IT systems. Entrepreneurs have built an experimental world of “decentralised finance”, of which bitcoin is the most famous part and which contains a riot of tokens, databases and conduits that interact to varying degrees with traditional finance. Meanwhile, financial “platform” firms now have over 3bn customers who use e-wallets and payments apps. Alongside PayPal are other specialists such as Ant Group, Grab and Mercado Pago, established firms such as Visa, and Silicon Valley wannabes such as Facebook.
Government or central-bank digital currencies are the next step but they come with a twist, because they would centralise power in the state rather than spread it through networks or give it to private monopolies. The idea behind them is simple. Instead of holding an account with a retail bank, you would do so direct with a central bank through an interface resembling apps such as Alipay or Venmo. Rather than writing cheques or paying online with a card, you could use the central bank’s cheap plumbing. And your money would be guaranteed by the full faith of the state, not a fallible bank. Want to buy a pizza or help a broke sibling? No need to deal with Citigroup’s call centre or pay Mastercard’s fees: the Bank of England and the Fed are at your service.
This metamorphosis of central banks from the aristocrats of finance to its labourers sounds far-fetched, but it is under way. Over 50 monetary authorities, representing the bulk of global GDP, are exploring digital currencies. The Bahamas has issued digital money. China has rolled out its e-yuan pilot to over 500,000 people. The EU wants a virtual euro by 2025, Britain has launched a task-force, and America, the world’s financial hegemon, is building a hypothetical e-dollar.
One motivation for governments and central banks is a fear of losing control. Today central banks harness the banking system to amplify monetary policy. If payments, deposits and loans migrate from banks into privately run digital realms, central banks will struggle to manage the economic cycle and inject funds into the system during a crisis. Unsupervised private networks could become a Wild West of fraud and privacy abuses.
The other motivation is the promise of a better financial system. Ideally money provides a reliable store of value, a stable unit of account and an efficient means of payment. Today’s money gets mixed marks. Uninsured depositors can suffer if banks fail, bitcoin is not widely accepted and credit cards are expensive. Government e-currencies would score highly, since they are state-guaranteed and use a cheap, central payments hub.
As a result, govcoins could cut the operating expenses of the global financial industry, which amount to over $350 a year for every person on Earth. That could make finance accessible for the 1.7bn people who lack bank accounts. Government digital currencies could also expand governments’ toolkits by letting them make instant payments to citizens and cut interest rates below zero. For ordinary users, the appeal of a free, safe, instant, universal means of payment is obvious.
It is this appeal, though, that creates dangers. Unconstrained, govcoins could fast become a dominant force in finance, particularly if network effects made it hard for people to opt out. They could destabilise banks, because if most people and firms stashed their cash at the central banks, lenders would have to find other sources of funding with which to back their loans.
If retail banks were sucked dry of funding, someone else would have to do the lending that fuels business creation. This raises the queasy prospect of bureaucrats influencing credit allocation. In a crisis, a digital stampede of savers to the central bank could cause bank runs.
Once ascendant, govcoins could become panopticons for the state to control citizens: think of instant e-fines for bad behaviour. They could alter geopolitics, too, by providing a conduit for cross-border payments and alternatives to the dollar, the world’s reserve currency and a linchpin of American influence. The greenback’s reign is based partly on America’s open capital markets and property rights, which China cannot rival. But it also relies on old payments systems, invoicing conventions and inertia—making it ripe for disruption. Small countries fear that, instead of using local money, people might switch to foreign e-currencies, causing chaos at home.
New money, new problem
s
Such a vast spectrum of opportunities and dangers is daunting. It is revealing that China’s autocrats, who value control above all else, are limiting the size of the e-yuan and clamping down on private platforms such as Ant. Open societies should also proceed cautiously by, say, capping digital-currency accounts.
Governments and financial firms need to prepare for a long-term shift in how money works, as momentous as the leap to metallic coins or payment cards. That means beefing up privacy laws, reforming how central banks are run and preparing retail banks for a more peripheral role. State digital currencies are the next great experiment in finance, and they promise to be a lot more consequential than the humble ATM. ■
"
!
