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El Salvador President Nayib Bukele announced that he will send a bill to the country's congress to recognize Bitcoin as legal tender. The forthcoming legislation is being framed as the next step in a partnership between Strike, which launched its crypto wallet app in the country in March. Reportedly, some 70% of the population there does not have a bank account, and 20% of the country's GDP comes from remittances sent by migrants to family members. If Bukele's Bitcoin bill goes through without a hitch, El Salvador will be the first nation to officially recognize Bitcoin as legal tender.

"Unless digital inclusion is already a reality, Bitcoin in El Salvador may be more exciting for those interested in conversations about the future of money than for Salvadoreans having to adjust to a new official currency."

US tax rule (section 988(e)) allows a $200 tax exemption for gains in personal transactions involving foreign currencies - those with legal tender status in any jurisdiction. But that exemption applies strictly to currency fluctuation gains in personal transactions like buying a cup of coffee or a car, not to profit-motivated transactions like speculative trading. Focusing on the $200 tax exemption for Bitcoiners, then, is mostly fruitless because the vast majority of trading and investing in Bitcoin is associated with transactions for profit instead of personal purchases.

Few things in monetary economics are more foggy than the concept of legal tender. Using the vernacular meaning of the term, Bukele's announcement is A BIG DEAL. If something is legal tender in the popular sense, then it has been declared to be official money. Salvadoreans would be able to walk into any supermarket and see bitcoin-denominated prices, and insist on paying with bitcoin. But the vernacular differs from the lawyer's much narrower definition of legal tender (indeed, there are a couple of legal definitions). A lawyer would probably dismiss Bukele's move as unimportant.

A supermajority of El Salvador's legislature voted in favor of President Nayib Bukele's proposal for the nation to adopt bitcoin as legal tender. The bill will mandate all businesses to accept bitcoin for goods or services, but the government will act as a backstop for entities that aren't willing to take on the risk of a volatile crypto-asset. The government will set up a $150 million trust fund at the Development Bank of El Salvador to instantly convert bitcoin to U.S. dollars to assume merchants' risk. The Development Bank's trust fund would sell some of the bitcoin it receives for dollars to replenish the fund.

International Monetary Fund (IMF) spokesman Gerry Rice reportedly said Fund staff will meet later on Thursday (June 10) with El Salvador President Nayib Bukele to discuss the recently passed bitcoin law that gives bitcoin legal tender status in the country. Rice reportedly said "adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis." El Salvador is also in discussions with the IMF seeking a near $1 billion program.

"Like many others, I will watch the dynamics of El Salvador's cryptocurrency sector with great interest and as a student of new forms of money I will be fascinated to see and understand the consequences of the bill. I have to say, though, that I am unconvinced that making one particular cryptocurrency a form of compulsory tender will deliver financial inclusion that improves the lot of the average El Salvadoran."

In the wake of El Salvador's move to make Bitcoin legal tender, Tanzanian president Samia Suluhu Hassan urged the country's central bank to begin exploring crypto assets. A number of lawmakers in Latin American countries have also expressed their interest in bitcoin following El Salvador passing the law making the cryptocurrency legal tender, including Paraguay, Argentina, Panama, Brazil, and Mexico.

"Bukele wants to succeed as president, and be seen as successful, in pulling El Salvador out of its economic troubles. But he has long been given to governance by the seat of his pants. The question is whether he can get away with bitcoin-fueled monetary policy before an angry populace starts setting buildings on fire."

The World Bank reportedly has said it could not assist El Salvador's bitcoin implementation. "We are committed to helping El Salvador in numerous ways including for currency transparency and regulatory processes," said a World Bank spokesperson via email to Reuters. "While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings."

"In his survey of forced money law, economist Dror Goldberg hypothesizes that the law's appearance through history is a function of economic and political authoritarianism. Goldberg documents the law's revival under the dictator Napoleon Bonaparte, who imposed a fine of "fine of six to ten francs and imprisonment of five days for relapse." It was subsequently exported to the countries that France conquered."

Strike CEO Jack Mallers revealed that the firm would be integrating with the top five banks and two biggest cashpoint distributors in El Salvador. He said the cashpoint stores would enable people to exchange cash for balances on a mobile app like Strike and vice versa. The integrations would remove the need for USDT because Strike would be able to hold customers' balances at the banks. It would also give them more places to cash out those balances for fiat currencies. The original plan was to hold recipient funds in USDT due to Strike's limited banking options at the time.

"I'm giving a qualified welcome to El Salvador's scheme. It could work, but there are enormous risks and temptations. And it must be connected with serious efforts to attract inward investment and develop export industries. Changing the monetary regime is all very well, but in the end, it is production of real goods and services that matters. That's where the wealth of nations comes from. "

To carry out its plan to make Bitcoin legal tender, El Salvador will rely on partners like Zap Solutions, whose digital wallet Strike is already being used by some Salvadorans. Although Strike has the technology to help El Salvador embrace Bitcoin, it appears not to have the US money transmitter licenses needed to make it useful for sending remittances from the United States. This could make many cash and crypto transfers to El Salvador using Strike potentially illegal.

El Salvador will be giving out $30 in bitcoin to any of its adult citizens who download the Chivo e-wallet and go through the facial recognition process. On June 8, El Salvador approved its bitcoin bill, stating the cryptocurrency will become legal tender in the country on Septemner 7. It also committed to providing exchange services for merchants, while also requiring that they accept bitcoin. Although the latter requirement is controversial, it is claimed that it would be discriminatory if businesses weren't forced to accept bitcoin because the unbanked wouldn't necessarily have another means of payment.

El Salvador's citizens will not be forced to use the government-issued Chivo ("Cool") Bitcoin wallet when the country's Bitcoin (BTC) law takes effect on September 7. The Chivo wallet will not incur fees or commissions for transfers, and unlike traditional crypto exchanges, it will not take a cut for converting BTC to USD and vice versa, plus, unlike credit cards, there will be no commissions charged to merchants or users. Also, the $30 government BTC handout announced on June 25 would not be convertible into USD, to emphasize the government's intention to encourage the use of Bitcoin and the Chivo wallet. But any money held in USD or BTC in the Chivo wallet will be able to be withdrawn into USD cash at any time once the government has completed its roll-out of 200 new physical Bitcoin ATM branches.

"El Salvador's President Nayib Bukele blessed El Salvador's Bitcoin Law, asserting that making bitcoin legal tender would reduce remittance costs. But as things currently stand, the cost of using bitcoin to send remittances to El Salvador is not, in fact, cheaper than traditional money transfer services. Remittances sent via traditional money-transfer services have a realized cost of only 2.85%. But, remittances sent via bitcoin will require Salvadorans to cough up much more than 5% to obtain the dollars they want. It's clear that remittance costs are not the reason that Bukele is preaching from the bitcoin pulpit." For more detail see: https://sites.krieger.jhu.edu/iae/files/2021/06/Bukeles-Bitcoin-Blunder-Final.pdf

The IMF is warning of the dire consequences of a jurisdiction adopting a crypto-asset as a national currency. For example, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto-asset while expenditures remained mostly in the local currency, or vice versa. Also, most jurisdictions considering such a move have adopted a major foreign currency as their own, thereby "importing" the credibility of the foreign monetary policy. Neither of these is possible in the case of widespread crypto-asset adoption. Hence, for example, if all prices were quoted in Bitcoin, the prices of imported goods and services could fluctuate massively. In addition, banks and other financial institutions could be exposed to the massive fluctuations in crypto-asset prices. Also, legal tender status requires that a means of payment be widely accessible. However, internet access and technology needed to transfer crypto-assets remains scarce in many countries, raising issues about fairness and financial inclusion.

By some definitions, this move makes bitcoin (BTC) and ether (ETH) legal tender. From next February, citizens and companies based in Zug will be able to pay up to CHF100,000 of their taxes in either BTC or ETH. No partial payments in crypto-assets will be accepted. For the initiative, authorities have partnered with the Zug-based crypto broker and custodian Bitcoin Suisse, which will convert crypto-asset payments into Swiss francs and hand them over to the tax office.

"Since Tuesday, Bitcoin in El Salvador has stumbled along in the form of the Chivo Wallet. The "$30" bonus is motivating people to sign up with Chivo! Then they find out all the ways it doesn't work."