3 reasons El Salvador adopted Bitcoin

Did you know that El Salvador was the first country to adopt Bitcoin as a legal tender in September of 2021? If not, you might be asking yourself, “What even is legal tender and why should I care?” Well, you know how all those myths about crypto seem to revolve around Bitcoin being fake, monopoly money? That’s why you should care. 

Legal tender means that the government legally recognizes it as a form of payment and requires that it be accepted for financial obligations. When was the last time you could pay your taxes or loans with monopoly money? Exactly: never.

So, why did El Salvador adopt Bitcoin as an officially acceptable currency? Here are three of the top reasons. 

Remittances

According to the World Bank, nearly 25% of El Salvador’s GDP comes from personal remittances. This is mostly money sent into the country from foreign economies through migrants or expats who send money back to friends and relatives in El Salvador. The current financial system makes transferring money across borders both difficult and expensive because of multiple intermediaries and fees. Bitcoin makes the process much easier. Not only can the transactions be done directly between individuals, the total remittance amount is higher when middlemen aren’t taking a cut.

Financial inclusion

One of the incredible potentials of crypto is allowing more people access to the financial world and a way to start creating and managing wealth. Without the gatekeeping institutions that currently place requirements on using their banking services, billions of people who are cut out of the market can join in. 

The president of El Salvador, Nayib Bukele, said one of the reasons he decided to adopt Bitcoin was that it “will generate jobs and help provide financial inclusion to those outside the formal economy.”

In mostly cash economies, the unbanked population has a very restricted ability to save or invest their wealth, making it difficult to plan for the future or build safety nets. Bitcoin can bring more people into the digital financial economy with a lower barrier to entry, capturing a larger market than traditional banks ever could. 

Less reliance on the dollar

Before Bitcoin was adopted as legal tender, El Salvador used the USD as its official currency. This is beneficial for smaller economies because they don’t have to worry about their own monetary policy and can benefit from trade in the world’s global reserve currency. A downside, however, is that they’re not in control of money supply or policy.

Using a larger country’s currency exposes smaller economies to the downfalls of the central bank that issues the currency. This erodes the sovereignty of smaller countries, despite some of the conveniences. 

Having Bitcoin as an additional form of legal tender is a first step in detaching El Salvador’s economy from the US economy—which during June of 2022 reached 9.1% inflation!

Conclusion

There are a lot of reasons for countries like El Salvador to adopt Bitcoin as legal tender. While the country has received some criticism around the world, this is to be expected with such a pioneer move. And, if the world’s confidence in crypto continues to grow as it has, and its impact on the global economy increases, more countries may follow El Salvador’s example.