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What does it mean for EL Salvador to use Bitcoin as legal tender
Let's back up from that for a bit and understand first that he is proposing The Bill to congress to do that and it is not a done deal yet.
Secondly, let's look at the country. As some of you may know that El Salvador has one of the highest crime rates in the world with the capital city of San Salvador being ranked as one of the most dangerous cities in the world.
But is it really that bad? Well, first let's understand the country a bit.
El Salvador is a democracy which was up till recently dominated by 2 political parties:
Nationalist Republican Alliance
Farabundo Martí National Liberation Front
However, President Nayib Bukele is from a 3rd newly founded party called Nuevas Ideas (New Ideas) and won the 2019 presidential elections. Before, being president of the country President Nayib Bukele served as the Mayor of San Salvador from May 2015 to April 2018.
During this time he has worked on improving the city and getting rid of the crime in the city, particularly cleaning the historical downtown area.
He is trying to improving the country from a crime ridden to a developing country.
What President Nayib Bukele is doing is trying to improve the economy of El Salvador with Bitcoin being adapted as legal tender.
Now since it is still a bill at this moment it needs to get passed first before it becomes a law and at present the Nuevas Ideas party holds 56 / 84 seats in the Legislative Assembly, so it is possible.
But what would the terms of the act be if it is passed, that is the real question. Now, can there be two legal tenders in El Salvador? a fiat currency and Bitcoin?
Currently, El Salvador uses US Dollar as its currency which replaced the Salvadoran colón in 2001.
In this regard, if El Salvador passes the bill with to use both USD and Bitcoin then it is possible to see that functioning as well. Because there are certain down sides to using Bitcoin (BTC) as a regular currency because of the transaction time and fees involved.
Now El Salvador is planning on partnering with digital wallet company, Strike, to build the country’s modern financial infrastructure using bitcoin technology.
This could mean that perhaps we can see some sort of integration with Bitcoin's Lightning Network to ease the transaction or the Strike wallets could be a custodian wallets that will hold all the Bitcoin and only ownership numbers are transferred between wallets, sort of like a bank.
But here's a better idea, if the citizens can use Bitcoin as their official currency then they can choose to transact in different Cryptocurrency like BitcoinCash or Nano by converting his legal tender of Bitcoin.
Here's an example:
Say Ms. X works in a restaurant and paid monthly salary of 0.01 Bitcoin which would mean 0.12 Bitcoin a year.
Now imagine her tax liability is 0.03 Bitcoin
So every month she convert 0.0075 of her monthly salary to BitcoinCash or Nano and use it for her expenditures.
And at the end of the year she'll have 0.03 Bitcoin left to pay her taxes.
So theoretically the system can work, it will interesting to see how this will take shape in reality.
However, from an outsider's prospective what does this mean?
If Bitcoin becomes the official currency of El Salvador then other government may have to recognize it as such and this could bring tax exemptions to a certain amount of Bitcoin for travelers.
In US, trading foreign currencies gains must be reported and are taxed. But Section 988(e) carves out a de minimis exception for “personal transactions” where the gains do not exceed $200.
This could interestingly create a loophole in the tax system and give El Salvador a unique positions for Crypto investors.
And it does seems like President Nayib Bukele is trying to attract Crypto investors and entrepreneur.
While the country is improving under the current leadership it still has a road ahead itself to improve overall situation as a safe and developing country with good law and order and tourist friendly environment.
As well as its image and perception that the people have of the country.