El Salvador is a central American country and since the 22nd of December 2000 the US dollar was accepted as legal tender in the country. This is due to the issues around a failing currency and rapid inflation. The current President of the country, Nayib Bukele, has recently been in talks with Jack Mallers, who is the CEO/creator of the Zapp Bitcoin (BTC) lightning network wallet. Together these two and many experts crafted a plan to make BTC legal tender in their country. The plan was centered around bringing greater wealth and benefit to its inhabitants.
What is legal tender though? According to general commercial law (Body of law that applies to rights, relations and conduct of businesses engaged in commerce) legal tender means that a citizen must accept “X” (be it fiat currency or other legal tender) if offered in payment of an obligation arising from delivering property or a service. It is important to note that legal tender is a fundamental part of Commercial law.
According to the US Uniform Commercial Code (UCC) (This law was established with the goal of synchronizing the laws of sales and other commercial transaction in the United States of America) section 1 – 201(24) “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. Now, this could lead to the USA recognizing BTC/Cryptocurrency as legal tender, i.e money. Whether this will happen is yet to be seen but going according to the wording of the UCC, we might have found a backdoor for BTC to become legal tender in the U.S. of A.
On or about the 6th of June at the Bitcoin Miami conference, Jack Mallers and President Bukele gave a surprise announcement that President Bukele would be sending a bill to congress to make bitcoin legal tender in his country. He stated that “In the short term this will generate jobs and help provide financial inclusion to thousands outside the formal economy.”
According to the decree posted by the President, it is a shocking but expected figure that nearly 70% of the El Salvadoran population does not have access to bank accounts and work in the informal sector of the economy. In order to better address these issues, Jack and President Bukele partnered together to bring a secure, efficient and globally integrated open payments network to the nation. A large chunk of the money that flows in is via diaspora remittance.
What is diaspora remittance and why is it important to fledging nations around the world? A large percentage of the population in underdeveloped nations often are forced to leave their native country in order to find better work opportunities, called migrant workers. For example, imagine a family who lives in Argentina in a remote village, the eldest son leaves for America to pursue the American dream and send money back home. That act of leaving your native country to go to another for work and then sending a bit of your salary back to your family, is called Diaspora remittance.
On the 8th of June, the Bitcoin Law bill was passed in congress by a majority vote. It then went to President Bukele for signing and affirmation. We are going to focus on a few Articles in the Law that we find to be imperative.
Firstly, we must take note of articles 2 through 7. We are going to briefly touch upon these parts:
- Article 2 – The exchange rate between BTC and the United States of America Dollar (USD) will be freely established by the market
- This is important as it states that the value of BTC will not be controlled by the Government or any fiscal/monetary policy, the true value will be derived from the free market.
- Article 3 – Prices may be expressed in BTC
- This means that when you go to the supermarket, for example, the displayed prices may be displayed in a FIAT currency or in BTC.
- Article 4 – Tax Contributions may be paid in BTC
- This is massive, usually one must settle their tax obligations with their local government in the local government’s currency but now, one is able to use BTC to settle these obligations.
- Article 5 – Exchanges in BTC will not be subject to capital gains tax
- This is the big news! Usually, when one would sell their BTC or swap it for another cryptocurrency, they would incur capital gains tax HOWEVER, capital gains tax does not apply to the conversion or payment of legal tender. So the usage of BTC as a means of payment will be completely free of any capital gains tax.
- Article 7 – Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service
- Imagine this as when you go to your local store and pay in your local currency, due to that local currency being seen as legal tender, the merchant is forced by law to accept your legal tender for the goods/services you acquire. In the context of BTC, this means that any and all merchants in El Salvador are forced by law to accept BTC as a means of payment for any and all services.
These are just some of the articles from the Law that I wished to briefly touch upon, now I really want to focus on Article 8 and article 9.
Article 8 aims at addressing the issues surrounding education about blockchain technology as well as the availability of conversion from BTC to USD.
Article 8 states: “Without prejudice to the actions of the private sector, the State shall provide alternatives that allow the users to carry out transactions in bitcoin and have automatic and instant convertibility from BTC to USD if they wish. Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.”
It is important to note what is said in this article. Firstly the government is stating publicly that they will not interfere in the private sector’s actions to provide BTC to USD conversions and they will work in tandem with the private sector. This is great for the private sector, it allows room for private companies to come into the country and provide their services unencumbered by the State’s implemented program. This section also infers that the state will take active steps to provide infrastructure and services that will allow their citizens to convert BTC to USD, that is outside the course and scope of the private sector. They have also stated in Article 14, that the State will create a trust at the Banco De Desarrollo de El Salvador (The Development Bank of El Salvador) which will help facilitate the automatic and instantaneous convertibility of BTC to USD.
Another part that I find imperative to this working and having a butterfly effect across Latin America, is the following: “Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions”. Education is the greatest tool anyone can use, with it anyone can carve a path to greatness; they are able to break the shackles of ignorance. With greater educational drives throughout El Salvador, President Bukele intends to make the access & use of BTC as simple as possible. It will involve numerous educational drives aimed at the lower socio-economic population who are mainly unbanked.
Being excluded from the financial system results in most citizens migrating to America for work. In a quoted interview from 2019, President Bukele stated that “I have the opposite problem of Trump, he wants migrant workers to leave, I want them to stay!” – El Salvador hopes to keep its citizens at home.
The final article in the Bitcoin Law Bill I want to visit is article 13. Article 13 states that all obligations in money expressed in USD, existing before the date that this bill will come into force, may be paid in BTC. What this means is that the government is stating that all past debts, taxes or monetary obligations may be paid in BTC. Now, whether this must be at the agreement of both parties is yet to be seen, however due to BTC taking the form of legal tender in El Salvador it may be inferred that the debtor must accept BTC as a form of payment.
El Salvador has 9 months from the 8th of June 2021 till the law comes into full force and effect. That is enough time to get the wheels, that are already moving, in motion. We are hopeful for the future of BTC and cryptocurrencies in the world. This is only the beginning of a long and arduous journey that will see us revolutionize the financial game.
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Written by Alexander Hilton © Crypto University 2021