On September 10th, 2021, El Salvador officially adopted Bitcoin (BTC) as legal tender making it the first nation to do so. President Nayib Bukele hopes Bitcoin will alleviate the country’s current economic problem and stimulate foreign direct investment. At present remittances account for at least 20% of GDP, with sending paying high transaction costs for currency conversions and fees. Many are also classed as the “unbanked” where around 70% do not have a bank account. Using Bitcoin means they can reduce transactional friction, make cheap cross-border payments, all without a traditional bank.

With a population of around 6 million, mobile phone prevalence is estimated to be over 146 percent, according to BuddeComm, making it ideal for crypto adoption. To help facilitate the transfer to Bitcoin, each Salvadorian has been gifted $30 in BTC to use – even allowing them to pay their taxes in crypto. While Nayib is ahead of the pack, we are likely to see other countries adopt a form of Central Bank Digital Currency (CBDC) to help digitize their economies. A PwC report recently highlighted that 60 governments are funding research to make their own, with 88% of those basing them on a blockchain, the technology premiered by Bitcoin. That said not all CBDCs will be currencies, some would function like bonds, or an interbank lending tool to accelerate payments are increasingly becoming automated or machine-driven.

Against this context, executive directors of the IMF, where El Salvador is seeking more than $1bn in funding, raised their concerns about using Bitcoin as legal tender. Saying:

“[The directors] stressed that there are large risks associated with the use of bitcoin on financial stability, financial integrity and consumer protection, as well as the associated fiscal contingent liabilities,”

Despite the resistance, Nayib, also self-styled as the country’s “CEO”, is planning to build a volcano-powered Bitcoin mining operation named “Bitcoin City”. The development will encourage foreign investment into the country and arrange a free economic zone of sorts.

At the time of writing, El Salvadore has approximately 1,801 Bitcoins at an average trading price of $50,000 per coin. With digital wallets being rolled out, so far nearly 2.1 million citizens have downloaded and used the official digital wallet. This makes the country a real test case for the use of crypto as it was intended by Satoshi Nakamoto. The use of BTC will create a level playing field for all citizens as frictionless international payments are now accessible to everyone, allowing wide-scale connectivity to international markets.

The increasing adoption of digital currency must be a unnerving experience for dollar adovcates, seeing that the world is leaning away from a once unbrekable monopoly. Excessive money printing, and use of fuduciary currency as a weapon against nations has turned the tides of opinion to globally. The Chinese government have been actively developing their own CBDC and are said to be much further ahead the development curve than the UK, and US. Whether they will be fungible with Bitcoin remains to be seen, but it is clear that a fragmented currency landscape is becoming ever clearer.

Crypto maximalists and Bitcoin advocates will be seeing this change in the law as an opportunity to enact their belief (and rightly so) that crypto is a new chapter to sound monetary principles.