El Salvador will adopt Bitcoin as a legal tender in the country, becoming the first in the world to formally embrace the volatileas such.
The Latin American country's congress voted overwhelmingly in favor of the law late Tuesday, pushing forward Salvadoran President Nayib Bukele's proposal. The 39-year-old politician's party holds a supermajority in El Salvador's congress.
"It will bring financial inclusion, investment, tourism, innovation and economic development for our country," Bukele said before the vote.
The move also brings financial risks to ordinary Salvadorans and their country, experts say, as the cryptocurrency gains and loses huge amounts of value in a flash – and at times overnight.
The U.S. dollar is the country's official currency and El Salvador's economy depends heavily on money sent back from abroad. According to World Bank data, these so-called remittances to the country made up nearly $6 billion — or almost 20% of its gross domestic product in 2019.
On Sunday, Bukele tweeted that a "huge chunk" of that $6 billion is lost to intermediaries who take a cut of the financial transactions in dollars. Instead, he believes Bitcoin could be "the fastest growing way to transfer six billion dollars a year in remittances." According to the president, 70% of El Salvador's population lacks access to traditional financial services. Buekele said Bitcoin could improve financial inclusion and access to wealth in a desperately poor nation.
How does it work?
Bitcoin, as a legal tender, can be used in any transaction and businesses will have to accept that payment form, according to the legislation. The law also states that tax contributions can be paid via Bitcoin and exchanges in the cryptocurrency will not be subject to capital gains tax.
Under the new law, El Salvador will "promote necessary training and mechanisms so that the population can access bitcoin transactions." However, those who do not have access to technologies that can carry out bitcoin are excluded from being required to accept it as payment.
Bitcoin can be used as a legal tender when the law goes into effect in 90 days. The bitcoin-dollar exchange rate will be set by the market.
Impact of first country to adopt Bitcoin
El Salvador becoming the first to have bitcoin as a legal tender could be a sign of things to come for the cryptocurrency. Greg King, CEO and founder of Osprey Funds, a crypto asset management firm, told CBS News that having Bitcoin as a legal tender is a "big deal."
"I think it's a major milestone for Bitcoin and a very positive development," he said. "It remains to be seen how much adoption will be taken up by their citizenry. But just qualitatively, what it does for Bitcoin is further legitimizes its status as a potential reserve asset for sovereign and super sovereign entities."
Meanwhile, El Salvador is one of the poorest countries in the region, and Bukele is seeking a $1 billion program with the International Monetary Fund.
Siobhan Morden, managing director and head of Latin America fixed income strategy at Amherst Pierpont Securities, told CBS News that it's "really early" in the assessment of what the implications are for having Bitcoin as a legal tender in El Salvador and how it will work.
"It was a very sudden announcement," she said. "It was pushed through quite quickly. And so, it really raises concerns on how effectively this is going to be executed, and what the implications are for the country, especially in terms of its relations with its diplomatic relations and multilateral relations."
The fear for El Salvador — besides wild swings in bitcoin values for ordinary people — is that it could delay ongoing negotiations with the IMF, Morden said.
"El Salvador is a dollarized economy and has limited access to funding for its fiscal deficit for its financing programs. And it's really reached a level of saturation, in terms of issuing in its own local markets," she said. "So, its ability to access credit is dependent upon reaching agreement with the IMF, so, that can facilitate access to multinational loans."