It's been well over a decade since Bitcoin became part of the financial system. About 12 years ago, Satoshi Nakamoto created Bitcoin as a means for digital transactions. It was created as a way to bypass the traditional banking system after the 2008 financial collapse.
Over the last 12 years, Bitcoin has been on a bumpy ride. Apart from its volatility, there have been both positive and negative reviews as more financial experts initially had doubts over the biggest cryptocurrency in market value. As the years roll by, we have seen perceptions about Bitcoin change from being a sham to being a wedge against inflation, to be a legal tender for a country. Yeah, you read that right. A legal tender!
El Salvador Takes the Lead
On June 9, El Salvador became the first nation to make bitcoin legal tender. This means that businesses can accept bitcoin as payment and citizens can pay their taxes and bills with Bitcoin.
On June 9, El Salvador became the first country to make bitcoin legal tender. This means that businesses need to acknowledge Bitcoin as payment and residents can utilize it to pay taxes. Not exactly a day after, the president reported that he has instructed a state-owned geothermal electric organization to design a plan to provide bitcoin mining facilities with "very cheap, 100% clean, 100% renewable, 0 emissions energy."
That's big news coming off the frenzy around Bitcoin mining the last few weeks after Elon Musk tweets. Geothermal electricity is produced by capturing heat from the Earth itself. In El Salvador, that heat comes from volcanoes, and an estimated two-thirds of their energy potential is currently untapped.
Geothermal energy is the only renewable energy source that can provide annual baseload electricity without having to rely on the grid or expensive energy storage. That competitive advantage is evident in Iceland, where geothermal energy powers many of the largest mining facilities in the world.
The mining of cryptocurrencies is not limited to geographical location. One limit geothermal energy has is its distance from traditional consumers. This does not affect cryptocurrency in any way. Mining facilities can be deployed anywhere. This even increases the financial feasibility of developing future off-grid geothermal power plants. Off-grid power plants will enable developers to commercialize tens of gigawatts of untapped geothermal potential.
Nick Behling took the time to highlight the cost, benefits, and drawbacks of mining Bitcoin with geothermal resources.
The most important thing is that El Salvador has taken a huge step in moving blockchain and cryptocurrency in the right direction. However, El Salvador's decision to accept Bitcoin as legal tender has received both positive and negative feedback. The World Bank and IMF have expressed differing opinions on the Bitcoin law.
El Salvador requested help from the World Bank to assist the country in implementing Bitcoin as a legal tender. This fell on dead ears as the World Bank
The World Bank has rejected a request from El Salvador to assist the country in implementing bitcoin as a legal tender. The World Bank stated that they can't support El Salvador due to environmental and transparency shortcomings.
Other financial experts have given their opinions about the economic implications the Bitcoin law in El Salvador poses. How about we discuss the implications this law has on El Salvador?
What Does This Mean for El Salvador?
What economic implications come with making Bitcoin legal tender for a country? If a country is considering taking this up, let's look at a few factors that any country should consider before making the final decision.
One factor to consider is de-dollarization. De-dollarization describes a situation where a country sells its US Treasuries to hold reserves in other currencies such as gold or digital currencies and decides to use them for transactions between their most important trade partners. One advantage of this is that a shift to cryptocurrencies is a potential hedge against inflation. This can improve the economy over time.
Over the years, there have been talks about crypto taxes and regulations. How taxes are paid for crypto assets needs to evolve sooner than later. Taxes for crypto are nothing new. The proposed adoption of bitcoin as legal tender should be proof that as the market moves ahead, policymakers will keep up the pace.
Another angle to look at is how the relationship between nations that classify cryptocurrencies as legal tender and those that don't will be. Just because a country accepts cryptocurrencies as legal tender doesn't mean countries that have a pact with them have to. What future relations with these countries will look like, only time will tell.
One last factor which cannot be overlooked is the case of anonymity and corruption. Over the years, there have been cases of money laundering with cryptocurrencies. Making bitcoin legal tender will be attractive to criminals. Criminals are always looking for countries or regions with fewer laws and no traditions.
The president of El Salvador has promised beachfront properties for sale, no real-estate tax, no capital gains tax on Bitcoin, and permanent residency to anyone with three (3) bitcoins. This could be an invitation to criminals who want to launder money freely without the fear of being caught.
This type of investor residence program has had a checkered history. They became popular after the 2007-2008 financial crisis when countries vied for the wealthy to fill the gaps in the budget pool. But eventually, they collided with the residents. As criteria got looser, the negative effects of corruption and fraud became more obvious while the positive effects were negligible. Getting an influx of money from foreign investors has its issues as well as advantages.
For a country like El Salvador, which has struggled with crime, poverty, and corruption in the past, combining that with the anonymity of the cryptocurrency seems like a dangerous combination. Without regulation, the country could soon be full of money laundering criminals.
Who's Picking the Gauntlet
After El Salvador dropped the news, many Latin countries have endorsed the decision. Countries like Argentina, Panama, Mexico, and Paraguay.
Some countries are proposing the idea of making bitcoin a legal tender and others are proposing legislation to regulate Bitcoin. Some people say this isn't a bad thing due to the nature of Bitcoin as a currency that has nothing to do with any economy or coin.
Among these countries, it looks increasingly likely Paraguay will soon follow El Salvador, at least introducing favorable laws for cryptocurrencies.
Still, it remains to be seen whether more countries and companies in Latin America and the world at large will accept digital currencies more easily.