Crypto – from an instrument of speculation to legal tender? Maybe.
As CNBC reported on Monday (June 7), El Salvador is mulling laws that would make bitcoin as widely accepted as the hard cash – the bills or coins – that represent the satisfactory payment of any monetary obligation (which would be the general definition of legal tender).
In doing so, El Salvador would cross a rubicon, one where a digital coin would wield all the economic power of cash, sidestepping some of the concerns that other governments around the world have had about bringing digital offerings into competition with fiat.
CNBC reported that President Nayib Bukele has announced El Salvador’s partnership with the digital wallet company, Strike, to build an infrastructure that would use bitcoin. “Next week, I will send to Congress a bill that will make bitcoin a legal tender,” he said.
Separately, as reported by the BBC, Bukele said at a conference in Miami, where he signaled his bitcoin-related intentions, that “in the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy.” A string of Twitter postings from the president said that investing the equivalent of 1 percent of bitcoin’s market cap in El Salvador would increase the country’s GDP by 25 percent.
“On the other side, #Bitcoin will have 10 million potential new users and the fastest-growing way to transfer $6 billion a year in remittances,” he wrote, adding that 70 percent of individuals do not have bank accounts.
It’s interesting to note that the official currency in the country is the U.S. dollar, after having replaced the El Salvadoran colón early in the millennium. The introduction of bitcoin brings a currency that has no underlying asset – or peg, or band – to compete against the dollar, which is among the more stable currencies in the world. We wonder: What would be the impact of having, in effect, two currencies operating within the economy?
Possible Tax Implications
In other countries where gains and losses on bitcoin impact tax liabilities, recognizing bitcoin as legal tender may skirt taxes owed simply by holding the crypto. But then again, there are value-added sales taxes (VAT) levied in the country, so it’s possible that there would be some revenue coming into the Ministry of Treasury (which collects the VAT).
Beyond that, embracing bitcoin may be a way for El Salvador to put guardrails on an officially “sanctioned” crypto at the expense of others. After all, crypto still remains a wild west of (sometimes) sketchy offerings. By taking bitcoin in hand, El Salvador would be giving the marquee name in crypto a seal of approval.
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