By becoming the first country in the world to make bitcoin legal tender, El Salvador took a bold step into the future.
In recent months, the Central American country of El Salvador has made news headlines around the world following their announcement to make bitcoin legal tender, becoming the first country to do so. This has been met with a mixed reaction from financial institutions, such as the World Bank and the International Monetary Fund, due to the historically volatile nature of the cryptocurrency. However, El Salvador remains optimistic that they will soon become the new leading haven for Bitcoin.
In addition to the implementation of the legislation making bitcoin legal tender, El Salvador has also announced that they will be mining for bitcoin in an environmentally friendly manner. By taking advantage of the untapped geothermal energy produced from the country’s volcanoes, El Salvador is seeking to benefit from an economic boost through bitcoin mining. This article will focus on the introduction of bitcoin as legal tender, as well as the environmentally friendly mining process, and how they both have potential to benefit El Salvador.
The Bitcoin Law
On June 8, 2021, El Salvador became pioneers in the world of Bitcoin by passing their “Ley Bitcoin” (Bitcoin Law) through congress, resulting in bitcoin becoming legal tender in the Central American country as of September 7, 2021. Further to this, the government continues to promote the cryptocurrency by giving $30 worth of bitcoin to citizens who sign up for their national digital wallet known as Chivo. Foreigners who invest three bitcoin in the country will also be granted residency in an attempt to further promote El Salvador as a cryptocurrency-friendly destination.
Inevitably however, despite dispelling the fear from the potentially harmful environmental impact bitcoin mining may have, the promotion of bitcoin through the Bitcoin Law has led to skeptics calling out the passing of this law as a gamble, with many believing that the country will now become a haven to money laundering and other types of financial crime. This was cited by the World Bank who rejected a request from El Salvador to help with the implementation of bitcoin as legal tender in June 2021.
Nevertheless, there is still a wide scope of possibilities for the Bitcoin Law to help alleviate the poverty in El Salvador and have an overall beneficial impact on the Salvadoran economy. Temporarily excluding the benefit of geothermal energy powering the mining for bitcoin in El Salvador, which will be mentioned later in this article, the main ways in which the new legislation has potential to benefit El Salvador is by attracting new foreign investment and the removal of dependency on USD.
Beginning with the former, before the passing of the bill, the President of El Salvador, Nayib Bukele, stated that bitcoin has a market cap of $680 billion dollars, and if 1% of that amount would be invested in El Salvador, it would increase the country’s GDP by 25%. This shows that, if El Salvador successfully becomes the Bitcoin Capital on a global scale, the economic benefits would greatly improve the financial situation in the country. This attraction of investment has already begun, with several companies such as Athena Bitcoin, Strike and Paxful showing an interest in setting up operations in the country.
Further to this, it is arguable that the passing of the Bitcoin Law will reduce the dependency on USD. At the moment, there are eight nations outside of the United States who use USD as their official currency. This was originally introduced to reduce currency risk, however, this negatively results in these countries effectively outsourcing their monetary policy to the United States Federal Reserve. By introducing bitcoin as legal tender along with USD, it allows for a decreased dependency on USD, which currently reduces GDP and passes it to the United States.
Geothermal Energy Mining
In recent years, the mining of cryptocurrencies has come under intense criticism for the detrimental impact its operations have on the environment. Looking specifically into bitcoin, Bitcoin’s public ledger runs on a decentralized network called the blockchain, which is updated around the world through a network of computers operated by miners.
The mining process for the Bitcoin network results in large energy consumption due to the amount of energy required from the mining rigs when verifying transactions by solving complex mathematical problems. This growing concern of how the environment suffering from bitcoin mining has led to countries receiving negative criticism, which resulted in the Chinese government famously implementing a mining ban for cryptocurrencies in China in an effort to realize carbon neutrality.
While this has led to miners selling their equipment or moving overseas to continue their practice elsewhere, a country which has come to receive praise in recent times for their eco-friendly bitcoin mining is El Salvador. In June 2021, President Bukele stated that he would use a state-owned geothermal electric company to use geothermal energy from the country’s volcanoes when mining for cryptocurrency. This renewable energy source offers a clean alternative to the usually harmful mining of cryptocurrency found elsewhere.
So how will this benefit El Salvador? While there is a declining poverty rate, as the smallest country in Central America, El Salvador is recognized by the World Bank as a relatively poor nation. However, mining bitcoin could potentially be the way for the country to realize economic growth. Bitcoin miners receive bitcoin payments as a reward for their work in verifying the transactions. By mining with clean and cheap geothermal energy, El Salvador has the potential to become a global hub for mining, which will undoubtedly have a positive impact on the country’s economy.
In conclusion, there is no denying that the implementation of this legislation possesses various risks, which may prove to be problematic to the country of El Salvador as well as its citizens. The volatile nature of the cryptocurrency may result in negative economic impact, placing the country in a worse financial position than it currently is. Furthermore, its potential to be used for various types of financial crime may tarnish both El Salvador and Bitcoin, making it synonymous with illicit behavior similar to the events of Silk Road, which provided exposure to the public of how cryptocurrency can be used as a vehicle for crime.
However, this argument was dismissed by Bukele who took to Twitter to reject the notion by stating that the majority of the world’s money laundering is still conducted using cash. Therefore, if the risk of financial crime is ever present regardless of the currency, why not implement bitcoin when it has the potential to benefit the nation? Through the increase of investors, the reduced dependency on USD and the potential growth of El Salvador as an international mining hub through the use of geothermal energy. Regardless, September 7, 2021, will be a historic day, which many will view with keen interest to see whether the legislation will have the positive impact Bukele believes it is capable of or whether the skeptics of the law will be proven right.
This is a guest post by Seth Galia. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.