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Was El Salvador’s Bitcoin Law Ever Necessary?

On Tuesday, June 8, El Salvador became the first country in the world to adopt Bitcoin as legal tender via its Bitcoin Law. Bitcoin became a regulated and accepted means of payment under certain circumstances throughout the national territory.

The adoption of the currency is contradictory to the libertarian spirit in which it was born. For Bitcoin’s creator, Satoshi Nakamoto (a pseudonym of its author or authors) in 2008, a major motivation was the decentralization of a currency as a means of payment between peers, which would allow its free circulation without a central authority authorizing said transactions nor a law that governs it.

In fact, Bitcoin did not need a law to circulate within El Salvador. It has been used at the Bitcoin Beach”, El Zonte Beach, La Libertad, since 2019, in a project driven by Michael Peters and Jorge Valenzuela.

Bitcoin’s Economic Benefits to El Salvador

Rather than the governing of the cryptocurrency, in our opinion, the Bitcoin Law was brought in to meet other objectives. These include: 

  1. The promotion and specialization in the use of this cryptocurrency to replace traditional money, better known in the world of cryptocurrencies as fiat money
  2. Potential economic growth by attracting new investors or foreigners who have great fortunes in the cryptocurrency but few places to exchange it for goods or services
  3. An additional means to achieve greater financial inclusion, to the extent that access to this technology is also guaranteed to the largest number of the population
  4. A decrease in the cost of financial transactions and financing, whether granted to the public or private sector
  5. From a political perspective, an alternative to sending the remittances that sustain our economy, in the event that the United States Government imposes restrictions or in any way taxed said cash flow to our country

Supply and Demand

But why would a country adopt a cryptocurrency as volatile as Bitcoin? To answer this, we must look at the broader picture.

Bitcoin’s value has increased exponentially over the last 10 years. Just five years ago, it became more volatile due to speculation – the same flaw that accompanies the volatility of any currency or financial asset.

It has been reported that Bitcoin’s value has fallen by 50% in recent months. This is true in the sense that it had risen dramatically following Elon Musk’s announcement that Tesla would accept Bitcoin as a means of payment. There was speculation that more companies would follow.

To the extent the more people want to grab a small portion of Bitcoin, and to the extent that more and more businesses accept that currency as payment, the price of the currency will increase its value

But in an unexpected twist, Musk announced months later that he would stop accepting Bitcoin due to the energy cost involved in maintaining such technology. This announcement was followed by the restrictions on the use of Bitcoin imposed by the People’s Republic of China. As a result, the price went back to where it was before such events, which is known as the “floor price”. Clearly, it is volatile.

What determines the increase in the price of Bitcoin? There are two separate forces: the number of people who want to get hold of said asset (the demand), and how many people accept said asset in exchange for a good or service (offer). To the extent the more people want to grab a small portion of Bitcoin, and to the extent that more and more businesses accept that currency as payment, the price of the currency will increase its value. From the latter, the trend should be to continue rising, especially if it is conceivable that other Latin American countries, as we heard this week, are announcing that they will evaluate the strategy.

Article 13 establishes that “All obligations in money expressed in dollars, existing prior to the effective date of this Law, may be paid in Bitcoin”

One of the most controversial aspects of El Salvador’s Bitcoin Law is Article 7, which establishes that “every economic agent must accept bitcoin as a form of payment when it is offered to them by whoever acquires a good or service.” 

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In accordance with Art. 2 of the Competition Law, an economic agent is considered to be “any natural or legal person, public or private, dedicated directly or indirectly to an economic activity for profit or not”. This obliges anyone involved in the exchange of a good or service to accept Bitcoin as payment after the 90 days preceding the entry of the law. It is not yet known whether there will be sanctions for those who refuse to do so, or other measures that could help to mitigate the risks associated with currency volatility. 

Another controversial article is Article. 13, which establishes that “All obligations in money expressed in dollars, existing prior to the effective date of this Law, may be paid in Bitcoin.” This conflicts with the will of all those creditors who today could be forced to accept a means of payment that did not exist when the obligations were made.

Ultimately, the Bitcoin Law proves that no currency or means of payment is entirely “pure”, and that all are, to some extent, manipulable by individuals or groups of people in power. The decision at least puts us on the world map, and creates an opportunity we must take advantage of.

Piero Rusconi Bolaños

Piero Rusconi Bolaños is partner at CENTRAL LAW in El Salvador. His practice is focused in Corporate Law with emphasis in Mergers and Acquisitions and Corporate Commercial as well as Tax Law; has experience in the sectors of Banking and Energy, Environment, Natural Resources and Infrastructure and is currently Leading the Department of Data Protection, privacy and Technology of the firm.

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