Bitcoin is Now Legal Tender in El Salvador – How Does it Actually Work?

El-Salvador has made headlines in the past month, becoming the first country in the world to make Bitcoin a legal tender despite international warnings and skepticism about cryptocurrencies’ volatility. In early September, the country’s president announced that they had acquired about 550 Bitcoin tokens worth $26 million. Bitcoin will work as a legal tender alongside the US dollar, the country’s legal currency for the past two decades.

Why Bitcoin?

El-Salvador began debating the legislation about making Bitcoin a legal tender last year because it would spur investment across the country and uplift about 70% of its population without access to traditional banking services. As a decentralised virtual currency, Bitcoin allows users to send and receive payments worldwide without banks.

El-Salvador is heavily reliant on remittances, adding up to about $6 billion annually, equivalent to almost 20% of its gross domestic product. Making Bitcoin a legal tender would reduce the costs of money transfers and boost financial inclusion. Bitcoin transactions are faster and less costly than other money remittances since they do not rely on third parties.

Integrating Bitcoin as legal tender would save El-Salvador about $400 million lost in transaction fees for remittances from abroad annually. Many people have applauded the move, saying it would also modernise El-Salvador’s financial system.

How Bitcoin Works as a Legal Tender in El-Salvador

Making Bitcoin a legal tender gives it the same authority as the US dollar, which means people can now use it to pay for goods and services. That prompts businesses to adopt it as a means of payment. It also means the people of El-Salvador can now borrow loans and invest using Bitcoin, as it would be imperative for financial institutions to adopt it too.

The people of El-Salvador will now send and receive money from abroad in Bitcoin, which is less costly than conventional bank transfers and credit cards. However, users must own Bitcoin wallets to transact. El-Salvador has its Bitcoin digital wallet known as, Chivo, which will allow people to buy, spend and store Bitcoin. However, users can still buy and trade Bitcoin on popular crypto trading platforms, you can read more about bitcoin platforms on websites such as TrustPedia click here to learn more.

The new Bitcoin law gives the people the authority to formally use Bitcoin in any financial transaction, making it imperative for businesses to accept payment in that form. It also stipulates taxpayers would now remit their taxes in either Bitcoin or USD. Thus, cryptocurrency exchanges will not be subject to capital gains tax.

The government has also installed over 200 Bitcoin ATMs to enable people to buy and sell Bitcoin more conveniently. The BTMs are convenient because they facilitate the buying and selling of Bitcoin using cash. Besides, individuals can also use Bitcoin ATMs to send some money in Bitcoin urgently and safely. That means users will not have to rely on crypto exchanges to convert their cash into Bitcoin and vice versa.

The new legislation stipulates that the government conduct public awareness campaigns to train its population to access and use Bitcoin in daily transactions. However, it is not conditional for those without smartphones, tablets, computers, the internet, and other Bitcoin-centric technologies to accept it as a means of payment. Such individuals and businesses can continue using the US dollar.

Bitcoin promises increased economic growth in El-Salvador as a legal tender, helping almost 70% of the country’s population without access to banking services. However, the decision has also attracted criticism from a cross-section of the public and international agencies. Some have raised concerns that they do not know how to use Bitcoin. The international community has also criticised the new Bitcoin legislation, which puts the public at more significant financial risks due to cryptocurrencies’ high volatility.