Using bitcoin as legal tender
WHEN REQUIRED if someone has tried using Bitcoin to pay for it, a woman selling coffee and pastries in San Salvador, the capital of El Salvador, responds “thank goodness no” and rejects an attempt to do so. A man selling soup for lunch brushes off the idea, laughing. At dinner time, the phone battery and morale are low, your caller is pointed at a bar called Leyendas where the logo of Strike, a digital bitcoin wallet, adorns the walls. But the attempt to pay with bitcoin is fraught with confusion. The owner of the bar, who controls the wallet, is missing. A few frantic texts later, he sends his wallet address. Finally, 26,618 Satoshis (one hundred millionth of bitcoin), worth $ 12.50, are exchanged for beers.
On September 7, bitcoin will be legal tender in El Salvador, alongside the dollar. The Central American country of 6.5 million people is the first to attempt such a feat. A week before the big day, those who had plans in place to use bitcoin were the exception rather than the norm. Three-quarters of Salvadorans polled in July by Disruptiva, a polling company, were skeptical about the proposed adoption of bitcoin. Two-thirds were unwilling to be paid for it and just under half knew nothing about it. The World Bank and the IMF cautioned against adoption, citing the potential impact on macroeconomic stability and environmental costs of bitcoin.
Legal tender is generally defined as the money that the courts must accept to settle debts. But Salvadoran bitcoin law goes further, saying that companies must accept cryptocurrency as a form of payment for goods or services. It also came into effect very quickly. Nayib Bukele, the country’s president, who controls a large majority in the legislature, announced his intention to make bitcoin legal tender at a cryptocurrency conference on June 5. The law was approved three days later.
Skeptics argued that the move was just a blow: a blow to Ibrajim and Yusef Bukele, the president’s brothers, who are crypto enthusiasts. But the president says the move will help El Salvador gain foreign investment and lower the cost of remittances. He may not be entirely wrong. The bet could attract crypto-investors with deep pockets (although it may deter the more conventional). And his experience can provide a case study of whether one of bitcoin’s much-vaunted benefits works for ordinary people. A diaspora of around 2 million Salvadorans send remittances worth 20% of GDP house every year. But cross-border bank and wire transfers are slow and expensive. Wallet-to-wallet bitcoin transfers are fast and free.
The attempt will likely also reveal the limits of bitcoin. Many locals understandably fear its volatility, which makes it ill-suited to payments and debt. Those who accept it, like Leyendas, do not mention a price there, but convert to dollars at the point of sale. And there may be unforeseen charges, which could hamper its use. There are 200 bitcoin ATMs installed across the country to enable the conversion of dollars to bitcoins in digital wallets. The one used by The Economist took 5% fee. “I’m not going to use it,” says Irma Gómez, who runs a restaurant near such AT M in Santa Tecla, a town just outside of San Salvador. But she is also intrigued. “Let people try. ” ■
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This article appeared in the Finance & Economics section of the print edition under the title “Satoshis for cervezas”