El Salvador wants to adopt Bitcoin as legal tender. Here’s why.

El Salvador President Nayib Bukele announced the move in a broadcast at the Bitcoin 2021 conference in Miami, Florida on Saturday. A day later he unveiled on Twitter the benefits for investors resulting from the move.

Why does the president want this?

Accepting Bitcoin as legal tender would make it easier for the more than 1.5 million Salvadorans living outside of the country to send money back to their home country.

A low-income nation and the smallest country in Central America, El Salvador had a gross domestic product (GDP) just below $25 billion (€21 billion) in 2020, according to the International Monetary Fund. A study by the Pew Research Center says that nearly 20% of the country’s GDP comes from remittances, money sent home by Salvadorans living abroad. This requires the use of money transfer services, which often charge high fees. Payments can take days to go through. Bitcoin transfers avoid both of these problems.

The scheme would also allow El Salvador to capture some of the massive revenue circulating on the Bitcoin network, Bukele said.

“If 1% of it is invested in El Salvador, that would increase our GDP by 25%,” he wrote on Twitter on Saturday.

Bitcoin has a current market capitalization of $684 billion, according to cryptoassets price tracker CoinMarketCap.

A young and popular president, the move also reinforces Bukele’s image as a bold and digitally savvy leader.

• Bitcoin explained: How it works and what it is good for

  The cryptic token

  Bitcoin is thought of as a digital currency because it exists only virtually, without any physical coins or notes. It resides in a decentralized, encrypted network that is independent of commercial or central banks. This allows Bitcoin to be exchanged under the same conditions all around the globe. It’s also a cryptocurrency, because it uses encryption to conceal users’ identities and activities.

• Bitcoin explained: How it works and what it is good for

  Bitcoin’s mysterious founder

  The cryptocurrency was first publicly described in 2008 by an unknown person — or group of people — who used the name Satoshi Nakamoto. Its implementation began in January 2009, when it was released as open-source software.

• Bitcoin explained: How it works and what it is good for

  How to get hold of Bitcoin

  There are three different ways to acquire Bitcoin: First, you can buy the cryptocurrency with legal tender (e.g. dollars and euros) at online exchanges such as Coinbase or Bitfinance. Second, you may accept Bitcoin as a payment in exchange for your products and services. And third, you can create your own Bitcoins in a process known as mining.

• Bitcoin explained: How it works and what it is good for

  No Bitcoins without a wallet

  Before you can buy Bitcoin you have to install so-called wallet software onto your computer. It contains a public key (your address) as well as a private key that allows only the owner of the wallet to send or receive cryptocurrency. Smartphones, USB sticks or any other digital hardware or cloud-based data storage can serve as wallet. Without the digital wallet, no Bitcoin for you.

• Bitcoin explained: How it works and what it is good for

  Hats off for Bitcoin purchases!

  To see how the process of paying with Bitcoin works, let’s imagine Mr. X wants to buy a hat from Ms. Y. First thing Ms. Y needs to do is send Mr. X her public wallet address, which is like her Bitcoin bank account.

• Bitcoin explained: How it works and what it is good for

  A chain of blocks

  After Mr. X has received the public wallet address of Ms. Y, he signs off the transaction with his private key to verify that he is indeed the sender of the digital currency. The transaction is now stored on the Bitcoin blockchain with thousands of other transactions that are made with Bitcoin every day.

• Bitcoin explained: How it works and what it is good for

  Miners in the digital age

  Now Mr. X’s transaction is broadcast to all other participants in the peer-to-peer blockchain network, which are also called nodes. Essentially, they are private computers, or “miners,” which verify the validity of his transaction. After that, the Bitcoin gets sent to Ms. Y’s public address, where she can now unlock the transfer with her private key.

• Bitcoin explained: How it works and what it is good for

  The Bitcoin machine room

  Theoretically, everyone can become a “miner” in the blockchain network. But most of it is done in huge computer farms that boast the necessary computing power. Bitcoin processing keeps transactions secure by chronologically adding new transactions (or blocks) to the chain and keeping them in the queue.

• Bitcoin explained: How it works and what it is good for

  An irreversible string of data.

  The Bitcoin transaction between Mr. X and Ms. Y is finally included in a vast public ledger, the blockchain, where all confirmed transactions exist as blocks. As each block enters the system, all users are made aware of each transaction. Who has sent how many Bitcoins to whom, however, remains anonymous.Once confirmed, a transaction can’t be reversed — by anybody.

• Bitcoin explained: How it works and what it is good for

  Controversial mining for Bitcoins

  Miners generate new Bitcoins when they process transactions, which they do using special decryption software. Once solved, a new block is added to the chain and the miner is rewarded with Bitcoins. China is the biggest miner in the Bitcoin network. It’s cheap electricity from coal gives it a competitive edge over rival miners, mainly in the US, Russia, Iran and Malaysia.

• Bitcoin explained: How it works and what it is good for

  Power-hungry Bitcoin

  Due to the massive computing power needed for crypto mining and processing, the Bitcoin network consumes vast amounts of energy — about 120 terrawatt hours of power per year. University of Cambridge’s Bitcoin Electricity Consumption index, has calculated the cryptocurrency requires more energy than each of the countries shown in blue on the map above. Graphics: Per Sander Text: Gudrun Haupt

  Author: Gudrun Haupt

How would it work?

Bukele provided few details about how the adoption would work.

He plans to send a bill proposing the move to congress this week. Congress would then have to pass the bill in order to make El Salvador the first country in the world to accept Bitcoin as legal tender. Bukele’s New Ideas party currently controls El Salvador’s Legislative Assembly, so passage is likely. Bitcoin would be recognized alongside El Salvador’s official currency, the US dollar.

The rollout would be handled by the mobile payments app Strike, which recently debuted in El Salvador.

“What’s transformative here is that Bitcoin is both the greatest reserve asset ever created and a superior monetary network,” Strike founder Jack Mallers said on Saturday. “Holding bitcoin provides a way to protect developing economies from potential shocks of fiat currency inflation.”

Some 70% of people in El Salvador do not have a traditional bank account, Bukele said. The idea is that they could instead go online and create digital Bitcoin wallets, which they would use to send, receive and spend Bitcoin.

No national government currently recognizes Bitcoin as legal tender, but there are still a few ways to spend it: Holders of the cryptocurrency can exchange it between themselves via digital wallets that store their Bitcoin. They can use a third-party service to convert it into a government-issued currency, like the US dollar. And more and more companies, including payment service PayPal, have started or plan to start accepting Bitcoin as payment.

Is it a good idea?

Bitcoin has some properties that make it well suited to the financial landscape in El Salvador and other countries whose economies rely on remittance payments from abroad. For one, money can be transferred on Bitcoin’s network instantaneously, at little or no cost.

However, the country would also need the financial infrastructure in place to make it possible for people to easily buy goods and services with Bitcoin.

The cryptocurrency’s value remains volatile. This makes it unsuitable as legal tender people can rely on to pay for necessities like food and rent. The value of Bitcoin has fallen by more than $25,000 since hitting highs of nearly $65,000 earlier this year.

Despite these fluctuations, Bitcoin is still up compared to this time last year, which begs the question whether people will be willing to spend the crypto in the first place. Thus far, it has functioned more like a financial asset akin to gold than a currency meant to be spent on commonplace items.

Bitcoin’s decentralized system makes it vulnerable to such spikes and falls, qualities that financial regulators are keen to avoid, lest they wreak havoc on the global financial system. Bitcoin is not backed by any asset or government.

What does this mean for Bitcoin?

The announcement is the latest and arguably largest institutional win for Bitcoin following months of increasing mainstream recognition.

While many of the world’s central banks have said they are working on digital currencies of their own meant to work alongside traditional currencies, El Salvador’s proposal to work with an existing cryptocurrency is novel.

The move is likely to further cement Bitcoin’s position in the global financial landscape. At the same time, going through with such a move would be the greatest real-world test to date of Bitcoin’s viability as a large-scale method of payment. How well it works for El Salvador is sure to have global repercussions for the cryptocurrency, for better or for worse.

Article source: https://www.dw.com/en/el-salvador-wants-to-adopt-bitcoin-as-legal-tender-here-s-why/a-57801247?maca=en-rss-en-bus-2091-xml-atom