London (CNN Business)El Salvador has become the first country to adopt bitcoin as legal tender.
A majority of lawmakers have approved a proposal from Salvadorian President Nayib Bukele that will allow bitcoin to be used as legal tender in the country alongside the US dollar.
The law states that “all economic agents shall accept bitcoin as a form of payment when it is offered by the purchaser of a good or service.” It also says that tax payments can now be made in bitcoin.
Bukele, 39, is a right-wing populist who rose to power in 2019. He previously said that El Salvador would partner with digital finance company Strike to establish the infrastructure required to support the use of bitcoin as an official currency.
Giving a currency legal tender status typically means that it can be used by borrowers to repay debts. It doesn’t automatically mean that a person or business is required to accept the currency as payment for goods or services.
In a tweet prior to the vote, Bukele said that using bitcoin as legal tender would promote financial inclusion, tourism, innovation and economic development. El Salvador is the smallest country in Central America, and while it was quick to contain the coronavirus pandemic, its economy was hard hit last year, according to the World Bank.
The future of digital currencies
Although central banks around the world have reacted to bitcoin with fascination, they have been hesitant to embrace cryptocurrencies because of their extreme volatility. Bitcoin, for example, crashed by more than half its value earlier this year after rocketing to a record high above $60,000. Other, more thinly traded cryptocurrencies are even more volatile, trading up and down like seesaws — often based on speculation or meme tweets from Tesla (TSLA) CEO Elon Musk.
However, crypto’s rise in popularity has led the US Federal Reserve to look hard at the old-fashioned dollar’s limitations — particularly around payments and money transfers that can take days to accomplish. Bitcoin transactions happen almost instantaneously.
Cryptocurrencies also don’t require a bank account. Instead, they’re held in digital wallets. That could help people in poorer communities — such as many in El Salvador but also in minority communities in the United States — gain increased access to their finances.
Lael Brainard, a member of the Federal Reserve Board of Governors, laid out a case last month for a secure, central bank-backed digital currency that could create a more efficient payment system and expand financial services to Americans who have been underserved by traditional banks.
Federal Reserve Chairman Jerome Powell in May announced the central bank would publish a paper this summer laying out the board’s thinking on the benefits and risks associated with a digital US dollar.
Although cryptocurrencies like bitcoin are digital, a Central Bank Digital Currency would be fundamentally different from current cryptos because it would still be controlled by a central bank rather than a decentralized computer network.
— Stefano Pozzebon, George Engels and Allison Morrow contributed to this report
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