Let’s Start From The Beginning,
On June 5th, 2021 one of the most historic and memorable days in bitcoin history was made.
During the Bitcoin Conference in Miami, Strike founder, Jack Mallers announced that the President of El Salvador, Nayib Bukele will make bitcoin legal tender within the country, along with plans to add bitcoin to their reserves.
The announcement is shown in the video below:
It’s important to explicitly call out what is happening here — the President of a country has decided to embrace bitcoin. El Salvador lost their nation-state currency, the Colon in 2001 during a previous civil war and has essentially been running on the US dollar for 20 years now. There are both economic and geopolitical risks associated with your reserve currency being controlled by a nation that you compete with. El Salvador is not unique in understanding these risks and looking to mitigate the risks inherently embedded in the situation.
What’s Next?
Just four days later, on the night of June 9th, The Congress of El Salvador debated and ultimately passed legislation with 62 out of 84 possible votes to officially make bitcoin legal tender within the country. Bitcoin will now become legal tender, alongside the US dollar, in 90 days. The 90 day period is allowed for all businesses to set up their infrastructure to receive bitcoin payments.
During the process, Co-founder of coinmetrics, Nic Carter started a Twitter Spaces to analyze the bill once it was made public. There were eventually 25,000+ people in the room, including appearances by President Bukele and a number of other politicians from the country. While the President was talking to the global audience, Jack Dorsey and Mark Cuban were sitting in the room listening as well. The call lasted a total of about 6 hours until early morning!
Click to listen:
This type of unfettered access to the President of a country allowed for a special conversation that was centered around bitcoiners asking questions and receiving direct, simple language responses. Here are a few of the big takeaways from what President Nayib Bukele said:
The President and his administration believe bitcoin provides opportunities for his citizens. This is not exclusively about bitcoin, but rather a message to the world that El Salvador wants to be a leader of the future. They aspire to be an innovation hub. They want entrepreneurs and investors to know that El Salvador is open for business. Bitcoin is an important piece of the country’s future, yet the bigger story is an attempt by the President to significantly advance his country in a short period of time.
The President described a loss of hope over the last few years and an interest in trying to reverse that trend. He specifically stated “When did our vision of the future change from something so beautiful to something so dystopia? We have to remember that we build our future.”
“We not only want to support it [bitcoin], but we want to demonstrate that the world can benefit from it. El Salvador is not only a country anymore. It is a symbol of what bitcoin can do.”
The President confirmed that the US state department and the International Monetary Fund (IMF) had reached out to him after his plans for legal tender became public over the weekend. He seemed to believe that this action by El Salvador was a positive for the United States. At one point, Bukele explicitly stated that creating a better country for Salvadorians would lead to less illegal immigration to the US, among other things.
When asked about other efforts to support or embrace bitcoin, the President was clear that things are happening quickly and they haven’t had time to think through much more than what is proposed. As the discussion continued, one idea that he brought up was to leverage the geothermal energy from volcanoes in the country to allow miners to build facilities that use 100% clean, 100% renewable, and nearly free energy. Pretty wild that he presented that off the top of his head, but shows there is no idea too bold for him in my opinion.
The bitcoin bill mandates that every merchant must accept bitcoin, as long as they have the technology to do so, but they are not required to hold the bitcoin once they accept it.
The government will have a government wallet and trust fund that resides in their development bank (different than the central bank) and the original capital allocation will be $150 million. The idea is that the government will purchase any citizen or merchants’ bitcoin from them using the dollars in the trust fund. Over time, the $150 million will become the equivalent amount in bitcoin through these purchases.
The President did not rule out the idea of putting bitcoin in their central bank reserves in the future. It sounded like that decision was later in the sequence of the country adopting bitcoin, so he has work to do before that happens.
Taxes are accepted in Bitcoin.
(h/t Anthony Pompliano)
How Will It Work?
Payments will work through the Lightning network. The lightning network is a second layer interoperable technology applied to bitcoin that uses micropayment channels to scale its blockchain's capability to conduct transactions at ‘lightning’ speed. The transaction usually takes <5 seconds and is typically sent for no fees or very little fees depending on which application is being used. Some of the biggest companies brokering funds on the network are Strike, Muun, and Open node. - Learn more here
View Alex Gladstein using the lightning network below:
Once the business is paid in Bitcoin, they have the option to keep or sell the bitcoin for dollars, this includes even selling a fraction.
The Pros And Cons
Remittance-
Salvadorans last year received almost $6 billion from abroad, mostly from the United States. The sum is equivalent to ~23% of the country's gross domestic product (GDP)
Bukele stated bitcoin would allow Salvadorans to save on $400 million+ each year in commissions for remittances.
But many of the very people sending or receiving dollars to El Salvador are mistrustful of bitcoin. Meanwhile, World Bank data shows that the dollarized Central American country's U.S. remittance costs are already some of the lowest worldwide.
El Salvador is the smallest country in Central America by both population and size, some 70% of citizens are unbanked, according to the world bank. Meaning they lack financial inclusion and are denied access to a basic bank account. The unbanked face tremendous challenges in both saving and accumulating wealth. The 70% of unbanked raise hopes bitcoin could promote financial inclusion. However on the flip slide, a 2020 study concluded El Salvador had the second-lowest internet penetration in Latin America and the Caribbean, which could limit the uptake of utilizing bitcoin.
Economy stimulation-
Bitcoin gives Salvadorans the opportunity to save money, increase net worth and wealth.
El Salvador’s GDP is about $28.2 B. At the time of writing, Bitcoins market cap is ~$92
0B. If you took 1% of Bitcoin’s market cap and invested it into El Salvador, the GDP would increase by almost a third.
The GDP of El Salvador is changing annually by about 2-3% Y.O.Y. Now with bitcoin in place, the GDP is expected to amplify by triple to near $100 billion within the next 3-5 years.
potential short term price risks-
A Bitcoin crash would seriously hurt Salvadorans who had wholly or partly adopted Bitcoin for remittance income and savings. And it would cause a run on Bitcoin by businesses that have a guaranteed exchange route into the U.S. dollar because it would be in their interests to exchange their devaluing BTC for USD. That $150 million trust fund would very quickly run dry. Thus, the rest of the world might not be too enthusiastic about lending dollars to a country that had diversified its reserves into Bitcoin and run short of dollars as a result. The IMF, which is currently in negotiations with El Salvador about a potential $1B loan, has already expressed some concern.
The process will definitely be rough at the beginning but innovation is not easy. Rest assured, this is one small step for Bitcoin and a huge leap for mankind.
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arshmolu@substack.com or DM me on Twitter!
Thanks,
-Arsh
so informative & well written! that twitter spaces experience is absolutely wild. love that you had a front row seat to a historical conversation & were able to glean from your own experiences to include here. it makes your perspective objective, yet unique too. can’t wait for more!
Absolutely informative really knowledgeable can’t wait for more achievements..soo soo proud of the youngest entrepreneur..