[By Japhet Mesa]
On 9th June 2021, the legislative body of El Salvador approved a bill which made bitcoin legal tender in that country.
The bill was passed by a super majority of 62 out of 84. El Salvador effectively became the first country in the world to formally adopt bitcoin as its local currency, along with the US dollar which it has been using for the past 20 years.
The bitcoin law, as it has come to be known, mandates businesses to accept bitcoin as payment for services and goods much like fiat. Taxes can also be paid in bitcoin by Salvadorians. The government has guaranteed the convertibility of bitcoin to fiat by dedicating US$150 million in its development bank. This will ensure easy conversion of bitcoin to US dollar currency for those who will wish to deal in US$. The government will therefore build a bitcoin reserve.
Two main underlying reasons have informed the Salvadorian bitcoin law.
First, the need to financially include 70 per cent of Salvadorians who have no access to bank accounts. All one needs to transact in bitcoin, is a smart phone and the necessary software (wallet). And from statistics reviewed, the unbanked in El Salvador have embraced bitcoin over conventional fiat.
Second, to reduce the cost of remittances to the country. At present, more than two million Salvadorians live outside the country, sending back more than US$4bn each year. Unfortunately, up to 50per cent of these remittances get swallowed up in fees. Bitcoin fixes this by reducing fees involved and also reducing the time that transfers could take.
This move by El Salvador has been questioned by a number of experts. They warn that the move might complicate matters with the International Monetary Fund (IMF) where the country is seeking a more than US$1 billion bail-out programme. At the time of writing this article, the IMF had pointed out that there might be some regulatory complications sparked by the bitcoin law. As to the specifics, none have been laid out yet.
What is the implication of this historical move for bitcoin and the world at large?
What can our country, being part of the global village, draw from this? Can we afford to ignore the fact that bitcoin is gaining traction and that there might be ways our economy can plug in to rip benefits from this phenomenon brought about by technological advancement. There is need to reflect on this, lest we are left behind.
In our opinion, there is merit in the route that El Salvador has taken by adopting bitcoin as an alternative money. It goes against the human factor of resisting change and seeking out solutions from technology.
Statistics from the last 10 years indicate that bitcoin has been the best performing asset in the world. While it has major volatility concerns, the fundamentals of it being determined by market forces of supply (which is limited to 21 million) and demand (which is unlimited) speaks of its potential as a long-term store of value.
Some argue that bitcoin will do to the financial sector what email did to the postal service. Like all good things, we did not know that we needed email as a replacement for postal services until we got it. You can imagine the risk of sending a snail mail was quite substantial; delayed delivery; damaged contents; loss altogether; intrusion of privacy; etc. Email fixed all this.
Companies in the western world are continually adding bitcoin to their balance sheets as a way of protecting the funds from inflation. Mainstream banks are equally offering opportunities to their clients to invest in bitcoin.
All this speaks of institutional adoption of bitcoin. In the face of this, can Zambia afford to continue ‘studying’ the situation without taking action?
The reality is that with or without legal recognition there exists a thriving community of bitcoiners. We must mention here that we are not against regulation, if anything we look forward to it. However, it is our hope that any type of regulation will promote innovation and adoption. Further, we do not promote bitcoin for the purposes of speculation or crime. Rather, we see it as a cardinal compliment to fiat currency and a tool for social good.
In Zambia, bitcoin can drastically reduce the cost of international remittances. A drop in the cost of remittances coming into the country will mean that the citizenry at large will have additional disposable income, adding to our economic activities. Bitcoin can also be used as an indestructible store of value. Individuals can store their savings in bitcoin. Zambian companies can also take a leaf from companies in the western world by adding bitcoin to their balance sheets, thereby cushioning their hard-earned funds from inflation.
As with any new technological advancement, bitcoin is still undergoing a great many innovations that will take it closer to the people. Previously, it was largely only available to those in developed countries, and those in countries like ours had to jump numerous hoops in order to get their hands on some bitcoin. These days we have exchanges like Yellow Card based in Zambia that allow for easy buying and selling of bitcoin through a local bank or mobile money.
In conclusion, we wish to reiterate that we cannot afford to ignore bitcoin or operate from a level of ignorance on the issue. Let us study this money system and see what benefits our economy can gain from it. Let us have this in mind as we carry out research and development around bitcoin.
The author is a member of the Crypto Tamanga community – a community of cryptocurrencies and blockchain enthusiasts in Zambian. Email: email@example.com, WhatsApp: +260 964 393112.