By Nelson Renteria, Tom Wilson and Karin Strohecker
SAN SALVADOR (Reuters) -El Salvador has become the first country in the world to adopt bitcoin as legal tender after Congress approved President Nayib Bukele’s proposal to adopt cryptocurrency.
With 62 out of 84 possible votes, lawmakers voted in favor of the measure to create a law to adopt bitcoin, despite concerns about the potential impact on El Salvador’s program with the International Monetary Fund.
Bukele has touted the use of bitcoin for its potential to help Salvadorans living abroad send remittances back home, while saying that the US dollar will continue as legal tender as well.
“It will bring financial inclusion, investment, tourism, innovation and economic development to our country,” Bukele said in a tweet shortly before the vote in Congress, which is controlled by his party and allies.
The use of bitcoin will be optional for individuals and will not present risks to users, Bukele said, and the government will guarantee convertibility to dollars at the time of the transaction through a trust created in the country’s development bank BANDESAL.
By law, businesses must accept bitcoins when they are offered as payment for goods and services. Tax contributions can also be paid in cryptocurrency.
Its use as legal tender will begin in 90 days, with the bitcoin-dollar exchange rate set by the market.
Cryptocurrency supporters hailed the move as legitimating the emerging asset, but its impact on regulation, taxation, or bitcoin adoption in other countries remains to be seen.
Still, there were no immediate signs that other countries would follow El Salvador’s adoption of bitcoin.
“If this becomes the first of what becomes a trend and then snowballs, or if it will be a problem, we will only know through history,” said Brandon Thomas, a partner at the firm. Grayline Group Consulting.
Analysts have also said the move could complicate talks with the IMF, where El Salvador is seeking a more than $ 1 billion program.
He enjoyed his best day in two weeks, climbing as much as 6% to $ 35,200.
“The market will now focus on adoption through El Salvador and if other nations will follow,” said Richard Galvin of crypto fund Digital Asset Capital Management. “This could be a key catalyst for bitcoin for the next two to three years.”
Emerging economies, where bank penetration is much lower than in developed countries and dependence on money transfers from abroad is much higher, have quickly warmed up to cryptocurrencies.
Outside of the United States, the countries with the highest volumes of cryptocurrency production and trade are all developing countries, according to BofA, including China, Colombia and India.
But the use of digital currencies in general can also pose risks for dollarized economies, which have adopted foreign currencies as legal tender, such as El Salvador, he added.
Dollarization “is a major problem for macroeconomic and financial stability in many emerging markets, and it could work if digitization facilitates access to foreign currencies,” said David Hauner of BofA.
“The root cause of dollarization is high local inflation, which could also worsen if digital currencies turn out to be inflationary.”
El Salvador relies heavily on money sent by workers abroad. Data from the World Bank showed that remittances to the country accounted for nearly $ 6 billion or about a fifth of GDP in 2019, one of the highest rates in the world.
It is not clear what proportion of the remittances sent to El Salvador are in the form of bitcoin.
Cryptocurrency offers, in theory, a fast and inexpensive way to send money across borders without relying on the remittance companies that are typically used for such transactions.
But that has worried financial regulators and lawmakers, who warn that Bitcoin facilitates money laundering and other illicit uses.
Still, its use for remittances is irregular. Converting local currencies to and from bitcoin often relies on informal brokers, while trading often demands technical knowledge.
Bukele says that around 70% of people in El Salvador lack access to traditional financial services.
El Salvador will promote training and mechanisms to allow access to bitcoin transactions, the law said.