On 7 September 2021, El Salvador made history by becoming the first country in the world to make the cryptocurrency, Bitcoin, legal tender. A country that converted its currency into US dollars in 2001, it is the sixth-highest ranked country in inbound remittance from the US, contributing 22% to the GDP.
The reasoning behind making cryptocurrency legal tender is to assist around 70% of Salvadorans who are underbanked or do not have access to traditional financial services. Most lose 20% of their inbound remittances on transfer fees to financial intermediaries. However, almost all of them have mobile phones and can convert the cryptocurrency to dollars.
At the institutional level, the Honduras-based Central American Bank for Economic Integration began working with El Salvador to assist it in the implementation of Bitcoin as a legal tender.
The concept of legal tender is generally meant to mean that traders cannot refuse to accept what is offered, however, following protests and scepticism from economists and others, President Nayib Bukele tweeted in August that businesses do not have to accept Bitcoin. This is not unusual, because even in the US, airline companies can refuse to accept cash and small businesses can refuse to accept cards.
In response to the cost of cryptocurrency electrical costs, the government has already proposed a scheme to use geothermal energy to power Bitcoin mining.
Three countries poised to follow suit
Many other South American countries are in a similar situation as El Salvador and see making cryptocurrency legal tender, as a way to help with financial freedom and to offer its citizens a better financial future. These are Paraguay, Panama and Venezuela.
This landlocked country often quickly follows the example of its neighbouring countries and has already started the process of making cryptocurrencies legal tender. On 17 June 2021, Congressman Carlos Rejala tweeted that Paraguay would legislate Bitcoin as legal tender in July. He and Senator Fernando Silva Facetti introduced the measure on 14 July and, in October, a second bill will be passed to recognise Bitcoin officially as a currency.
One thing that has been hindering the process of making cryptocurrencies legal tender is the electricity usage that goes along with it. Almost all of the country’s electricity is made up of hydroelectric plants and around 90% of the produced electricity is exported to Brazil and Argentina.
Panama is known to be one of Latin America’s leading countries when it comes to economy and technology. This is due to the country’s location, as it is between North America and South America, lending it many opportunities.
When the bill for El Salvador was passed to make Bitcoin legal tender, Panama took note and Congressman Gabriel Silva tweeted that Panama should not be left behind and added that if they wanted to keep being Latin America’s technology hub, then they also need to take charge.
Also on 7 September 2021, Silva had submitted a bill to congress to allow Panama to make cryptocurrency legal tender. He has hinted that support for the bill is received from both the ruling and opposition parties of the state, meaning that unlike El Salvador, there might not be such a big backlash.
Venezuela will be driven by the high inflation that lingers over the country. Many expats still need to send money home and, with formal money exchanges, the money they send can decrease in value. This is not ideal for citizens who are already struggling to make ends meet.
One thing that can boost the usage of cryptocurrencies as legal currency is that Venezuela has the cheapest electricity. This makes crypto mining far easier. It can allow citizens to make use of cryptocurrencies to make payments for food, and offer them financial freedom.
With Venezuela announcing its own cryptocurrency in 2018, not much has gone in its planned direction, as the country’s fiat situation is dire. However, because of the willingness of its citizens and its technological advancements, it might very well be one of the next countries to pass the bill.
Financing the unbanked
From the Rio Grande in Mexico to the tip of Patagonia, crypto has become a lifeline for millions, in the face of soaring inflation and the absence of traditional banking services for large swathes of the population. As in many countries in the developing world, countries in Latin America are intermittently beset by political and economic crises and the crippling hardships caused by them.
Aware of this, several other countries show potential for cryptocurrency, as politicians in Argentina and Brazil have endorsed the El Salvador decision. It is suggested that before long, the whole of Latin America may pass similar bills, as it is one of the continents most in need of financial freedom.