There are only two countries in the world that have made Bitcoin legal tender. We are talking about El Salvador and the Central African Republic (CAR). These two countries decided to change their economies and start pushing for Bitcoin adoption at the state and civil society levels.
But which are the implications of these two countries using Bitcoin on a day-to-day basis? What is Bitcoin offering to these countries and their populations? Is this having a positive or negative impact? What’s the relationship between these two nations and international financial organizations? Let’s get into the details of these two countries and their path toward making Bitcoin legal tender.
What is Bitcoin (BTC)?
Bitcoin is the largest and oldest cryptocurrency in the world. The virtual currency is known for being the first digital scarce asset to be created in the world. It was released to the market in 2009 and it has been running since then. Therefore, Bitcoin is a reliable currency that can be used for a multiplicity of things.
Bitcoin is known for having 21 million BTC. The total supply of Bitcoin is capped at 21 million BTC. This is something that no other currency around the world can do. Indeed, central banks are pushing for higher inflation rates and an expansion of the monetary base. Therefore, banknotes and fiat currencies lose value every single day.
At the same time, Bitcoin does not have a central authority like a central bank or government. The network is governed by a set of decentralized nodes located all over the world that run altruistically and that hold a copy of the Bitcoin blockchain. That means that each of these nodes can protect the network by participating in the consensus of which rules apply to Bitcoin.
Nodes are easy to set up and relatively cheap for most countries. That means that there is no single point of failure for the Bitcoin network, which is resistant to state-level attacks. Bitcoin is becoming increasingly useful for many different things.
Users can send and receive Bitcoin across borders without having to be worried about a centralized authority controlling the payments, accepting or rejecting them. Therefore, Bitcoin shows that it is a unique tool for individuals and also companies to get access to funds and move them across borders without depending on traditional financial organizations such as banks or centralized financial institutions.
Bitcoin can be sent to another jurisdiction with settlement taking place in just minutes and for a very small fee at the time of writing. Thanks to its value proposition, investors believe that as the virtual currency becomes accepted around the world and demanded, the price measured in USD terms should also go higher. As you can see, Bitcoin has had a large impact around the world and it is now being adopted by several countries. It is just a matter of time before we see other countries adopting Bitcoin as a legal tender and using it as a store of value or as a means of payment.
Making Bitcoin Legal Tender
So what does it mean to make Bitcoin legal tender? We have seen that the cryptocurrency market experienced large growth over the last few years. Indeed, Bitcoin and other virtual currencies have been expanding since it was first released in 2009. But this expansion required many different steps.
The first thing that we have seen is that there was a strong adoption among retail investors. Everything started with tech-savvy people that were involved in the development of cryptography and digital forms of money. But things expanded quite fast, especially to buying and selling things on black markets (Silkroad).
But this was just the beginning of Bitcoin. It was then used by a large number of retail investors that saw the price of the digital asset skyrocket to unprecedented levels. This was one of the first waves of retail adoption of Bitcoin. But the market continued to attract new users, even during bearish times.
In 2017, we have seen the cryptocurrency market attract an even larger number of investors with the expansion of Initial Coin Offerings (ICOs). This pushed Bitcoin to $20,000 by December 2017 and was one of the historical moments for the digital currency. Traditional news agencies started talking about Bitcoin and other digital currencies.
Despite the fact that Bitcoin was hit by a bear trend in 2018 and 2019, 2020 ended up being a year of consolidation after the market crash that Bitcoin experienced in March 2020 with the Coronavirus crisis. 2021 was also the year in which companies such as Tesla, MassMutual and MicroStrategy decided to purchase Bitcoin and add the largest digital asset to their balance sheets.
As we can see, there was not just an interest in Bitcoin from retail investors but also institutions that decided that it was time to diversify their portfolios. With the expansion of the monetary base that we have seen during COVID-19 times, there has been a strong devaluation of national currencies all over the world. This could also have been one of the reasons why people and companies decided to purchase BTC.
2021 has also been the year in which El Salvador became the first country in the world to make Bitcoin legal tender. This was a decision that was then copied in 2022 by another country. Let’s get into the details of what happened to Bitcoin when it was adopted by nation states.
The Bitcoin Law was one of the main milestones for Bitcoin becoming legal tender in El Salvador. Indeed, thanks to this law, the Legislative Assembly of the country passed it on June 8, 2021. Three months later, El Salvador made Bitcoin legal tender and Bitcoin payments became obligatory for all types of businesses in the country.
The Bitcoin Law reads as follows:
“The purpose of this law is to regulate Bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.”
The deployment of Bitcoin as legal tender started. It received a large amount of attention from international media considering that it was the first country in the world to make Bitcoin legal tender and because Bitcoin surged to almost $70,000 in November 2021. Therefore, there were many reasons for the media to be covering this event.
Every single economic activity (both for those companies offering goods and services) must accept Bitcoin alongside the U.S. dollar (USD). Let’s not forget that El Salvador decided to ditch its local fiat currency El Colón in 2001.
Therefore, people are now able to use Bitcoin in order to pay for goods and services. In addition to making Bitcoin legal tender, the country deployed a wide range of Bitcoin ATMs that are now located in some of the most iconic and populated places in El Salvador, making it possible for people to exchange Bitcoin for US banknotes and vice versa.
Another thing that is worth taking into consideration is that with the deployment of Bitcoin ATMs, the government launched a wallet application called Chivo wallet. This wallet allows people to handle their Bitcoin and USD holdings and help them send and receive funds on the go. Therefore, there have been many infrastructure plans when it came to Bitcoin deployment.
Additionally, there have been projects that were planned using Bitcoin in the country. One of the most interesting things to take into consideration is the possibility of creating a mining facility using energy produced by a volcano.
Bitcoin has allowed for many new innovative things in El Salvador. This does not mean that everything is perfect. There have been some issues with users being scammed and people that were not able to receive the $30 in BTC they were promised due to ID theft.
The Central African Republic
There is another country that decided to make Bitcoin legal tender in 2022. We are talking about The Central African Republic. Analysts supposed that after the decision of El Salvador to make Bitcoin legal tender other countries in the region would follow, including Honduras. However, the next one on the list was the Central African Republic.
At the end of April 2022, the Central African Republic approved Bitcoin as legal tender. Therefore, it now pushes companies in the country to start accepting Bitcoin for goods and services. The decision to move from the French-backed CFA franc to Bitcoin could have deep implications for the country, one of the poorest in the world.
Compared to El Salvador, the decision to make Bitcoin legal tender in CAR has been much more complicated for this country. Indeed, there have been no extensive projects or plans to help local businesses accept Bitcoin and there has been almost no media coverage on that matter.
Furthermore, El Salvador received larger attention from international companies and organizations that have deployed large amounts of money in the country to promote the adoption of Bitcoin. Hence, it is just a matter of time to see how the decision to make Bitcoin legal tender by the Central African Republic would have an impact on people’s lives.
It is also worth pointing out that the Central African Republic has been using a currency, the CFA franc. This has created many problems for countries that use this currency, which is pegged to the Euro. That makes monetary planning almost impossible as the European Central Bank continues to push for a monetary policy that focuses on the Eurozone rather than on these countries.
This has a large impact on economic stability and monetary freedom for these countries. Therefore, the decision to make Bitcoin legal tender has been an almost extreme decision to move away from the CFA franc and to start focusing on a decentralized currency that is not controlled by some of the largest financial centres in the world.
One of the implications of making Bitcoin legal tender in El Salvador was related to the strong bank penetration effect that this had in the country. Before introducing Bitcoin, a small percentage of the population had access to traditional financial services (banks).
Before the introduction of Bitcoin in the country, only 30% of the population had access to a bank account. The number of Bitcoin users in El Salvador has surpassed 50% of the population in just a few months after making Bitcoin legal tender.
There are many other positive things to mention about how El Salvador changed its economy in just a few months. Reports suggest that the decision to make Bitcoin legal tender could cost money providers close to $400 million a year in commissions. This is why there has also been large criticism from traditional financial institutions around the world of El Salvador’s decision.
It is worth mentioning that El Salvador relies on remittances being sent from the United States to families in the country. Therefore, $400 million a year in savings would now come back to Salvadoran families. Therefore, there has been a strong positive impact of Bitcoin just before its launching.
As Nayib Bukele, the President of El Salvador mentioned, there could be many other benefits in the future that have not yet been taken into consideration.
When it comes to the Central African Republic, there are also some implications that are worth considering. One of the first things to note is that the Central African Republic is moving away from the CFA franc, which has been a way to continue French and European colonialism in Africa.
This could bring new opportunities to the government to move away from European control through economic and monetary means. It is clear that making Bitcoin legal tender would not be a decision supported by central banks around the world (mostly in developed countries), but it could be a way for poorer nations to show they do not need to depend on these traditional financial institutions.
It would be an interesting thing to see how the Central African Republic will expand the use of Bitcoin in the coming years. There could be some initiatives that would incentivize the use of this virtual currency and make the country find a strong and reliable currency.
The Economist Yann Daworo explained that thanks to Bitcoin, people will now be able to use smartphones to pay for goods and services. Additionally, while talking to BBC Afrique, he mentioned that it would now be easy to convert Bitcoin to any other currency.
“Businessmen will no longer have to walk around with suitcases of CFA francs that will have to be converted into dollars or any other currency to make purchases abroad,” he said.
As we can see, there are many implications for Bitcoin once it has been made legal tender. We would now have to wait to see what the long-term implications would be for these countries and the demand for Bitcoin. Despite the fact that El Salvador and the Central African Republic are relatively small countries when it comes to population, they could be just the beginning of a larger number of countries demanding and relying on Bitcoin for a wide range of things.