Bitcoin: Legalised by El Salvador

INTERNATIONAL/ SCIENCE & TECH

Topic:

• GS-2: Effect of policies and politics of developed and developing countries on India’s interests 
• GS-3: Science and Technology- developments and their applications and effects in everyday life

Bitcoin: Legalised by El Salvador

Context: El Salvador, a small coastal country in Central America became the first in the world to make Bitcoin, a digital currency, legal. The El Salvador Parliament approved the move by a supermajority of 62 out of 84. 

• The President added that the use of Bitcoin, whose use will be optional, would not bring risks to users. 
• “The government will guarantee the convertibility to the exact value in dollars at the moment of each transaction,” El Salvador President said.

What were the reasons for EL Salvador taking such decision?

• No impact on Monetary policy: El Salvador has no monetary policy of its own and hence, no local currency to protect. The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve. Thus, it was easier for El Salvador to legalise Bitcoin for it doesn’t impact its monetary policy as much as it would have in case of other countries like India, US, Germany etc.
• To mitigate dependence on US Dollar: The move in El Salvador is in part motivated by loose and expansionary Federal Reserve policy. While banks in the US received liquidity with the stimulus, El Salvador did not but lost purchasing power instead. Thus, EL Salvador wanted a digital currency that cannot be altered by Central Bank (of USA)
• Co-existence with Dollar: President of El Salvador clarified that this does not constitutes “de-dollarization” of the economy. He believes the dollar will continue to remain the dominant currency in the country and Bitcoin would exist side by side. 
• Attracting Investments: The overall use of Bitcoin appears less motivated by its use as a currency and much more by the image and investment boost this could give El Salvador towards innovation. This move is being used to portray innovator friendly environment for luring “technology, talent and new ideas” into the country. 
• Potential shift in remittances: Remittances make up close to 20% of El Salavador’s GDP with flows approximating $6 billion annually. President Nayib Bukele has said that this move of legalising iotcoin will help people cut down on middleman payments during remittances.

Challenges

• Talk with IMF: Experts have said the move to Bitcoin could complicate talks with the IMF, where El Salvador is seeking a more than $1bn programme.
• Impact on Tax collection: The move makes it difficult for the government in raising of tax revenues. Cryptocurrencies are overall a very easy way to avoid taxation and a very easy way to simply avoid the authorities because it’s a completely decentralised system, one can do money laundering and one can do tax avoidance 
• Implication on money laundering: With large scale cryptocurrency inflows and outflows, it would be expected that El Salvador would comply with the 2019 FATF guidance on Virtual Currencies which mandates multiple KYC requirements on cryptocurrency activity. It is unclear if these are in place in El Salvador or would be put in place.

Implication on India

• The impact Bitcoin has on these remittance inflows would be worth monitoring for India, which is home to the largest remittance market in the world. 
• Although there might not be many lessons from a monetary policy perspective but efficiency, anti money-laundering and other aspects could be closely monitored.
• The overall takeaway for India from the El Salvador case is not in the monetary sense at all but as an example of how far countries are willing to go to attract innovators and entrepreneurs working on this emerging sector

Connecting the dots:

• China’s Digital Currency
•  Blockchain Technology and Voting