El Salvador made bitcoin a legal currency. Now it gets interesting | CNBC Beyond The Valley

beyond the valley Hello, and welcome to another episode of CNBC's 
Beyond the Valley. I'm Arjun Kharpal in Guangzhou,   China, but today we're going to be speaking about 
El Salvador because it's become the first country   to adopt bitcoin as a legal currency. Now, this 
is a really big deal because for such a long time   bitcoin proponents around the world have been 
urging countries to adopt bitcoin, to embrace   the digital currency, and now we have our first 
real world example of that. Our first real world   experiment to see how that plays out. Now it 
was president Nayib Bukele, the president of El   Salvador, who introduced the bitcoin law into the 
legislative system. It passed the congress's vote   and has now been adopted as law and that law is 
interesting because it gives some of the reasoning   around why El Salvador wanted to adopt bitcoin as 
a legal currency.

I just want to read some of that   for you. Because in there, it says 70 percent of 
the population does not have access to traditional   financial services, and bitcoin is seen as 
a way to potentially help solve that problem   as well. Now another big part of the picture here 
is remittances. This is money Salvadorans outside   of the country are sending back home to their 
families. For example, remittances in 2020 the   country received nearly six billion dollars 
worth of remittances, accounting for nearly   25 percent of its GDP, and bitcoin is touted as 
a way to make remittances, that money transfer   process faster and cheaper as well. President 
Bukele has also claimed that bitcoin could give   the country a GDP boost. But adopting bitcoin as 
legal tender, as a legal currency, what does that   actually mean? Well according to the law, it means 
prices can be expressed in bitcoin. Taxes can be   paid in bitcoin.

It means exchanges in bitcoin are 
not subject to capital gains tax as well. There   is a line in there which is interesting because 
it stirred a bit of controversy, and that line   says this: "Every economic agent must accept 
bitcoin as payment when offered to him by whoever   acquires a good or service." Now, the reason 
it stirs some controversy is because it appears   to compel everyone selling a good or service to 
accept bitcoin, but what if they don't want to?   That's just one of the many questions here, 
on top of the fact that we know bitcoin is   extremely volatile. If you're a merchant, one day 
you accept bitcoin as payment and that moves ten   percent down or ten percent up in the next hour 
or so. That volatility, that uncertainty could   be quite unsettling as well.

There's so many other 
questions. For example, is El Salvador's digital   infrastructure ready? Given the fact that this is 
a digital currency, there's going to be a lot of   infrastructure that needs to be put in place, as 
well as education for people who may not ever have   heard of bitcoin. So certainly lots of questions. 
To get to the bottom of these questions,   I'm joined now by Rachel Ziemba, an Adjunct Senior 
Fellow at the Center for a New American Security.   Her focus is very much on finance economics and 
the links between those and security issues as   well. So Rachel, there are a lot of questions and 
concerns about El Salvador's move to make bitcoin   legal tender. One of those is the fact that 
the US dollar is already the official currency   there in El Salvador.

What does it mean then by 
bringing something like bitcoin into the system? So the biggest thing is that the government 
of El Salvador is introducing bitcoin as this   alternate legal tender, which basically 
means that if one goes into a store   and does a transaction or has a debt with another 
individual, that they have to accept bitcoin.   So El Salvador is a little bit unique because 
it's one of the few countries that uses another   country's currency as its legal tender. So there's 
some countries that peg to the US seller. There's   other countries that sort of use their own.

But 
El Salvador is already using another currency   so they've already ceded monetary 
control. What they're doing now   is they're saying that private sector, that 
individuals, have to accept bitcoin. So what's   unique about that is they're moving from 
what has been a rather cash-based economy,   to one in which bitcoin is a digital asset. So 
they're in some ways making several leaps at once. Yeah there's a lot to unpack 
there. I mean, just practically,   other examples of countries having two   currencies as legal tenders. I mean, how do sort 
of multiple currency systems work in the world? Sure, so one thing that's unique about El 
Salvador is that they have two official   currencies as legal tender.

There's plenty of 
countries where you might have one currency,   but then you go into a shop and they'll accept 
another currency – US dollars or euros often – or   individual transactions will take place in 
those countries. You see that a lot in countries   where the currencies are volatile. 
Places like Nigeria, places like Turkey,   but that's not necessarily official, and 
so that doesn't require the shopkeeper   or whoever to accept that other currency.

What's 
unique about this beyond the fact of it being   bitcoin, is that there's two assets that are 
not co-moving and one that's very volatileS   o beyond the digital question, you have a 
whole sort of society that is probably not   used to the sheer volatility of bitcoin 
and questions about access to it. And that's really a huge point isn't it, 
Rachel? The volatility of bitcoin. You know,   I'm a merchant and someone pays me a bitcoin 
today.

Then there's a big eight or nine percent   crash the next day, and now I've lost that 
value. You know, the other question is if you're   talking about any kind of debts or anything like 
that. What price is this going to be determined   in? Is it going to be in bitcoin, USD? I mean, 
is it going to be from the point at which you got   the debt or when the debt is due? There's so many 
questions around that volatility, isn't there? There are, and I think that's going to mean 
a lot of people could lose a lot of money   or perceived money and value. Particularly 
given that El Salvador is a country that   relies a lot on remittance flows being 
sent from the US in particular. It's one   of the countries that's reliant heavily on 
these transactions, and so there might be an   anticipation that x amount of this transfer 
is going to buy y amount of goods at home,   and there could be a lot of questions there. 
As the law seems to be written right now,   and there are many questions about that.

It 
seems to require any transaction, that debts   should be allowed to be settled in bitcoin, but i 
think there's a real sort of question about that.   There are plenty of other transactions globally 
that might be conducted in bitcoin. You know,   rents that are taken, purchases that are made, 
but often they're quickly converted into a fiat   currency. I think there's a real question mark 
about how that's going to work in El Salvador,   and who's going to bear that cost of that 
volatility. The risk is that some of the   average citizens are going to be the ones that pay 
for that, as well as the private sector entities   that are going to be struggling to think about how 
are they hedging these risks.

There's not a lot of   tools. There are also other risks involved, 
including transaction costs of converting. And if read the law as it's written, it compels 
people, merchants or anyone to to accept bitcoin,   and they can't refuse that. But the 
other point that you've mentioned is   the fact that there is this kind of digital divide 
to some extent in El Salvador. Given the fact that   that bitcoin is seen as a digital format, 
that can make things very difficult, right? I think that's that's true.

El Salvador is a 
country where the majority of transactions to this   point have been cash based. Because the US dollar 
is legal tender, that actually has meant that   the government has had to import and make 
sure there's sufficient dollars available.   The u.s government you has facilitated. I mean, 
the amount of dollars used in El Salvador are a   drop in the bucket of the turnover of 
the US dollar markets on a daily basis.   But that sort of transition, question marks of 
what happens if cell service or wi-fi service goes   down. What about people losing access to perhaps 
their accounts? There's all sorts of things that   we see in other countries that I think could 
be magnified if this was something that was   going to be legal tender, as opposed to just 
an alternate means to say get money out of the   country.

In El Salvador's case, I do think this is 
really a story of trying to rebrand the country,   provide some buzz, but also try to perhaps 
reduce some of the reliance on the US.   But I think it may create a whole number of other 
problems while trying to alleviate one problem. What would you say are some 
of those other problems? Sure so I think this question of connectivity 
This question mark of whether there's going   to be local mining of bitcoin and what the 
electricity bill would look like for that.   Question marks about whether this is going 
to backdate past transactions versus future   transactions. Question marks about what happens 
if the volatility leads to significant losses. What would you say then are the main motivations 
behind El Salvador's decisions there? Because you   mentioned an interesting one just now, and that 
was around reducing reliance on the US dollar.

Why   is that important, and what do you think some of 
the other considerations or motivations are here? Sure. So El Salvador adopted the US 
dollar more than, around 20 years ago,   and they did that. They're not the only country 
that uses the us dollar as legal tender.   Countries like Ecuador do it as well. Other 
countries peg to the US dollar: Hong kong,   the Gulf states, just to name a few. All of 
these countries in different ways are looking   for currency stability that comes from sort of 
pegging to an external hegemon or external entity.   Now we could look at it and say the dollar is not 
super stable.

It fluctuates against other major   currencies. It fluctuates against commodities. 
It fluctuates against these issues. But a   country like El Salvador, which had gone through 
cycles of boom and bust and inflationary cycles,   they were basically tying their hands and 
saying we can't manage our own monetary   policy, and so we'll just sort of import the 
monetary policy from the Fed. That can create   its own problems because the Salvadorian economic 
cycle doesn't always line up with that of the US.   So you could have monetary tightening at a time 
when the alternate was needed in El Salvador,   but I digress. The main issue here I think is a 
challenge that because of the reliance on the US   dollar, there's a need for strong correspondent 
banking relationships with the US. There's a   need for intermittent importing of the physical 
currency, particularly sincedollar bills do wear   out right over time.

And as the US has more and 
more of a focus and concern about anti-corruption.   We've seen the White House label corruption 
as a national security challenge. We have   several members of the government of El Salvador 
under investigation for money laundering issues.   It strikes me that looking for alternate 
ways of transferring funds, of transferring   wealth and generating wealth, that don't have 
as much of a US exit would be attractive. The   challenge is that the US Treasury has a long 
arm, and we know that there's a lot of extra   territorial application of sanctions and 
other measures, not only when you're using   the US dollar.

So I don't think that this move 
to bitcoin necessarily removes these concerns. Rachel, I do want to ask, is 
there is there an economic   argument here? I want to read you something 
that President Bukele said. He said,   "Bitcoin has a market cap of 680 billion dollars. 
If one percent of it is invested in El Salvador,   that would increase our GDP by 25 percent." 
Obviously, that's not entirely correct,   but will this have effect on growth at all? Or can 
it have an effect on growth at all in El Salvador? So i think it can have an impact. The question 
mark goes back to, does adopting bitcoin as   a legal tender lead to new innovation 
in bitcoin and blockchain technology?   Does the government do other policies 
perhaps to encourage bitcoin farming or   that innovation? And we've seen other countries 
in places like Bermuda and elsewhere, sort of   invest a lot in kind of digital sandbox. 
Without adopting another currency, they've   been able to sort of develop this industry. 
I think the key is it's not just about the   adoption.

It's about all the other infrastructure. 
Just having a certain amount of bitcoin present in   the country doesn't necessarily increase GDP. 
GDP is about what's produced in the country, so   the assets matter. The question is, are the assets 
being deployed to build new real estate projects?   Are people investing in new businesses? So I 
would say that domestic economic policy, any sort   of government investment projects, those probably 
matter more than just the use of bitcoin. I mean,   anything that makes it easier for foreign and 
local investors to set up businesses, to create   value, that's going to be what the game changer 
is moreso than just what's the legal tender. Great. Rachel, do you think there are other 
countries at this point looking at this?   Can you see any countries around 
the world that might find bitcoin   an attractive option also to make it legal tender? Sure.

So there are. I've heard of some other 
countries that are considering it, particularly   some of El Salvador's neighbors. In fact, there 
does seem to be a little bit of copycat sort of   activity. I think in general, what i think we'll 
see more of, is countries using and adopting   blockchain technology and perhaps developing their 
own digital assets. We've had a big increase,   and I'm sure you've talked about it a lot on 
the podcast, we've had a big increase in central   bank digital currencies interest, obviously pilot 
projects. That lowers transactions costs. It also   probably increases the ability of governments 
to monitor activities.

For some countries, that   might be a design feature, not a flaw. I could see 
more countries wanting to make it easier for their   population to engage in financial transactions, 
and lower those costs, reduce some of those   transactions costs, and while the government 
and the central bank still maintains a degree   of control over capital inflows. So I definitely 
see that happening more with large countries,   but even some of the smaller ones, you know 
moderate size emerging markets, I see them   preferring that sort of control over what's 
transiting through their their financial borders. Great. Rachel, yeah we certainly have spoken a 
lot about central bank digital currency. It's   an interesting topic. I think that's gonna have to 
be another episode though at this point. Thanks so   much for talking to me today about El Salvador, 
bitcoin.

It's been fantastic having you on. Thanks, pleasure. Pleasure to chat. So all eyes are going to be on what country 
is next, which country is going to follow   El Salvador's example in adopting bitcoin as legal 
tender. Now the El Salvador decision has certainly   caused some stir globally amongst financial 
institutions. The World Bank actually rejected   the country's request to help it with implementing 
this bitcoin rollout. The World Bank citing   environmental and transparency shortcomings 
related to bitcoin. Now you heard Rachel. They've   also mentioned central bank digital currencies 
or CDBDs. They're effectively digital versions   of fiat currencies being developed 
by central banks around the world,   and that's going to be interesting to see how that 
plays out and what kind of impact that will have   on other digital currencies like bitcoin as they 
continue to roll out.

Of course, remember central   bank digital currencies are very very different 
from bitcoin, in the sense that the central bank   digital currency is issued by a central bank, a 
central entity. Of course bitcoin is known as a   decentralized currency. But we've got a whole 
episode on central bank digital currencies,   if you want to know more on Beyond the Valley. 
Certainly take a listen as well. But there are   certainly lots of questions going forward as we 
watch this El Salvador experiment play out. It's   going to be a fascinating one. I'd love to hear 
your thoughts. You can get in touch with me on   Twitter. I'm @ArjunKharpal. You can also comment 
below in the comment section, and don't forget to   subscribe to CNBC International's YouTube channel 
as well. That's it for another episode of CNBC's   Beyond the Valley. I'm Arjun Kharpal. Thanks for 
watching and listening. I'll catch you next time.

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