Legal tender digital currencies: the 5 most relevant economic measures in the El Salvador case

Since 2020, El Salvador adopted the US dollar as the legal tender, losing monetary independence. However, on September 9, 2021, the “Bitcoin Law” came into effect that regulates the cryptocurrency bitcoin as legal tender in the central american country, becoming the first country in the world to give Bitcoin the function of “money” for the 6,325,827 Salvadorans.

The cryptocurrency managed to get hold of the three functions of money, which are the following: a) Medium of exchange that consists of using money to carry out any type of transaction, thus facilitating the exchange of goods, products and services; b) Unit of account that consists of determining the units of value, or prices, of goods, products and services; and c) Reserve of value that consists of being able to buy something in the future.

Based on this law, the government of El Salvador, led by Nayib Bukele, promoted a series of measures to promote the massive adoption of this new legal tender.

But, what have been the main economic measures since the entry into force of the Bitcoin Law?

5 most relevant economic measures in the El Salvador case

First, it has allowed more than 70% of the population that did not have access to any type of digital financial service, to begin to understand and use new technologies to make digital payments. For example, businesses are beginning to accept digital payments for goods and services through the use of the electronic wallet called “Chivo Wallet”.

Second, a third of Salvadorans living in the United States are generating significant savings due to lower financial intermediation commissions when sending remittances to their relatives in El Salvador. Let us remember that the sending of remittances represents close to 30% of its Gross Domestic Product (GDP) in El Salvador.

Third, the government has announced the issuance of "Volcanic Bonds" which seek to finance the "Bitcoin City", a very ambitious project that aims to attract investment and talent, as well as prepay debt issued in US dollars that currently maintains with the International Monetary Fund (IMF).

Fourth, the government has created a trust to facilitate the settlements of US dollars with bitcoins, as well as making investments in the cryptocurrency Bitcoin, in such a way that it can take advantage of implicit volatility and realize gains or losses due to price differences.

Fifth, it has been declared that the country will record with 0% the income tax rate of income from various sources such as the provision of independent professional services, the paid work of company employees, the profits obtained for the sales of goods, products and services of the companies, the sales of real estate, as well as the profits obtained by the difference in prices for buying and selling bitcoin.

Finally, although it is too early to be able to measure the economic, social and environmental impact that these measures are going to have on the lives of more than 6 million people in El Salvador, this story has just begun with a government that has opened the possibility of power be re-elected for another term of presidential government.

The video with the presentation is available in the following link.