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By Yashasvini Razdan, 1:07 PM ET
The early hours of Wednesday witnessed history being created as El Salvador became the first country in the world to make bitcoin a legal tender.
The government said that the legislation will be effective within 90 days. A trust would be set up at the Development Bank of El Salvador to allow quick conversion of the U.S. dollar to bitcoin.
The legislation that will take effect in 90 days, allows citizens to pay taxes and bills using bitcoin. Businesses that cannot process bitcoin would be exempted from obliging to such payments. Bitcoin can be converted into other currencies without being subject to capital gains tax.
El Salvador has been one of the poorest countries in Latin America, struggling to manage its finances. The government hopes to raise financial inclusion using bitcoin, as according to the government’s statement, 70% of its population lacks access to traditional financial services.
The country adopted the U.S. dollar as its official currency in 2001. During the pandemic, the U.S. Federal Reserve infused monetary inflation in the U.S. economy by increasing the number of dollars being circulated. This caused El Salvador to lose purchasing power as it received no infusions from the Fed.
The country spent two years trying to build a network to facilitate low-cost bitcoin transactions. President Nayib Bukele had tweeted that if 1% of the world’s bitcoin moved to El Salvador, it would increase the country’s GDP by 25%.
Bitcoin has been a speculative and extremely volatile investment. The greatest example of its volatility is Elon Musk’s tweets, which have caused swift falls and rallies in bitcoin. The average bitcoin transaction fee is $4.70, as reported by Wall Street Journal (WSJ), which increases when traffic on the bitcoin network is higher, making it inconvenient for small payments.
Despite the shortcomings, poor countries are looking at cryptocurrency as a way to free themselves from the bondage of the dollar. Venezuela and the Bahamas are two such examples.
Meanwhile, on Wednesday, Bitcoin was trading at $36,332.87, down about 50% from its April peak.
Picture Credits: CNBC