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What you need to know about El Salvador's plan to use volcano-powered bitcoin as legal tender

·5 min read
El Salvador President Nayib Bukele speaks during a news conference in San Salvador, El Salvador, June 6, 2021. REUTERS/Jose Cabezas

When El Salvador voted this week to make bitcoin legal tender, it marked the start of an experiment sure to draw close attention amid a global surge in interest in cryptocurrency.

Nayib Bukele, the Latin American nation's meme-loving millennial leader, claims that embracing the cryptocurrency "will generate jobs and help provide financial inclusion to thousands outside the formal economy." Remittances from citizens living abroad make up about a fifth of El Salvador's gross domestic product, according to World Bank figures, and Bukele believes that bitcoin has the potential to transform the way that money is sent across borders.

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But critics suspect that the move is a publicity stunt intended to distract from what they see as Bukele's authoritarian tendencies, including his party's ouster of El Salvador's attorney general and several top judges.

The new law has also raised numerous questions about how goods and services will be priced, and the environmental ramifications of bitcoin mining. Here's what we know so far.

Q: What will it mean for bitcoin to become legal tender?

A: Bitcoin, the most popular cryptocurrency, is a decentralized digital currency that has gained traction as an alternative to money issued by governments. Its value has been highly volatile.

Merchants in El Salvador were already free to accept bitcoin as a form of payment. Once the new law goes into effect several months from now, however, they'll be required to do so unless they lack access to the necessary technology. People will also be permitted to pay their taxes in bitcoin.

The U.S. dollar will remain El Salvador's main currency, Miguel Kattán, El Salvador's secretary of commerce and investment said Monday, according to El Mundo, a Salvadoran newspaper. Goods are to be priced in U.S. dollars, rather than bitcoin, which tends to fluctuate wildly and involve long strings of decimals.

"Someone said yesterday, and I was laughing, how are you going to pay 0.00000001 of bitcoin for tomato? How is that transaction going to work?" Kattán said Monday. "What you are going to pay is the $0.20 that the tomato costs. Period."

The government also intends to set up a $150 million trust at El Salvador's development bank that will allow citizens to convert bitcoin into U.S. dollars. But it's not yet clear how the exchange rate would be determined.

Q: Will bitcoin replace traditional money transfer services?

A: Bukele thinks that it can, and has claimed that the amount of money that low-income families receive from remittances "will increase in the equivalent of billions of dollars every year" because middlemen will no longer be taking a cut.

But sending remittances to El Salvador is already relatively inexpensive, because the use of U.S. dollars means that payments don't have to go through currency exchanges, Alex Holmes, the chief executive and chairman of MoneyGram, a money-transfer company, told The Washington Post.

MoneyGram has launched its own foray into bitcoin, which it plans to expand to international markets later this year, but Holmes said he doesn't see cryptocurrency replacing traditional wire transfers anytime soon. For one thing, the number of people actually using bitcoin remains relatively small, and many see it as a speculative investment.

"I think it's just a simple lack of utility," Holmes said, noting that people who get paid in U.S. dollars would then have to go through another series of steps to convert that money into bitcoin, which typically requires paying exchange fees. Then there's the fact that people are simply used to - and comfortable with - U.S. currency.

It's also not clear if bitcoin will be widely adopted within El Salvador, where many people do not have access to the Internet. Bukele said in a recent tweet that the government plans to build satellite infrastructure that will allow rural Salvadorans to connect to the Internet, but that could be a long time coming.

Q: Will El Salvador allow bitcoin mining?

A: "Mining," the process that creates more bitcoin, requires running computers that eat up a massive amount of electricity. Global bitcoin mining consumes more electricity than the amount used over equivalent time by the entire nation of Argentina, according to one Cambridge University analysis - and the strain on the environment has prompted crackdowns in countries including China.

The law passed by El Salvador's legislative assembly makes no mention of mining. But during a live conversation on Twitter Spaces on Tuesday night, Bukele announced an idea that had suddenly occurred to him: El Salvador's volcanoes could be used as a renewable source of geothermal energy.

"Every day is going to be a new idea," Bukele told the audience of over 25,000, according to Coindesk. The following day, he announced on Twitter that he had directed the country's state-owned geothermal electricity company to develop a plan that would allow bitcoin miners to tap into "very cheap, 100% clean, 100% renewable, 0 emissions energy from our volcanoes."

Hours later, Bukele said that engineers had already dug a new well that would become the center of a new bitcoin mining hub, and shared a video of the steam pouring out.

Q: What are the potential advantages - and disadvantages - of adopting bitcoin as legal tender?

A: Supporters of the idea hope that the move will open up new opportunities for the roughly 70% of adults in El Salvador who do not have a bank account. Many also see it as a way for the country to attract foreign investment and become a hub for cryptocurrency entrepreneurs.

But because bitcoin is unregulated, the move has also raised concerns about the potential for money laundering, tax evasion and other shady dealings. Kattán said Monday that El Salvador's government would introduce protections against money laundering, but it's not yet clear what those would look like.

El Salvador is seeking $1 billion in funds from the International Monetary Fund, and some analysts have warned that Bukele's sudden decision to embrace bitcoin could complicate those discussions.

An IMF spokesman said Thursday that the move "raises a number of macroeconomic, financial and legal issues that require very careful analysis" and that the organization would discuss its concerns with Bukele.

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