El Salvador on Wednesday, became the first nation to approve bitcoin as a legal tender, shooting the embattled cryptocurrency up more than 10% from its two-week low.
El Salvador’s president, Nayib Bukele had proposed the bill last week amidst the country’s inflation crisis. Congress passed the “Bitcoin Law” with 62 votes, 19 opposed and three abstentions, according to a tweet sent by Bukele. The new law thus makes cryptocurrency a legal means to pay in the small Central American country.
Bitcoin picked up at the news, trading above $36, 000. Ether recorded nearly 8% increase, trading above $2,500, while XRP, Cardano and Dogecoin recorded 9.84%, 11.86% and 6.37% growth respectively as of press time. Last week Tuesday, bitcoin was as low as $31,000, its lowest level since May 23, according to data from CoinDesk. The decline of the world leading cryptocurrency, which plunged further following Elon Musk announcement that Tesla will quit accepting bitcoin, was compounded by China’s clampdown on miners and financial institutions dealing on cryptocurrencies.
Investors seemed deterred by the development, as upsurge in selloff indicates. In May, the cryptocurrency was hit with a massive selloff during which its market capitalization dropped below $1 trillion. $141 million was pulled from bitcoin products by institutional investors in the week ended June 7, according to digital asset investing firm Coinshares. Trading volume in bitcoin digital asset investment products also slumped, by 62% compared with last month.
El Salvador’s approval of bitcoin as a legal tender has become the only credence the cryptocurrency has received in weeks, putting it in the mood of recovery.
As part of efforts to boost bitcoin acceptance in the country, Bukele said in Twitter Space conversation that the country is designing a new law that would grant permanent residency to any individual who invests three BTC into El Salvador’s economy.
He also announced plans to help businesses to cope with the new law. The bill that was just passed will mandate all businesses to accept bitcoin for goods or services, but the government will act as a backstop for entities that aren’t willing to take on the risk of a volatile cryptocurrency, the president said.
“If there’s an ice cream parlor, he doesn’t really want to take the risk, he has to accept bitcoin because it’s a mandated currency, but he doesn’t want to take the risk of convertibility, so he wants dollars deposited in his banking account, when he sells the ice cream, he can ask the government to exchange his bitcoin to dollars,” Bukele said. “Of course, he can do that in the markets also, but he can ask the government to do it immediately.”
The Development Bank’s trust fund would sell some of the bitcoin it receives for dollars to replenish the fund.
Government officials from El Salvador will meet with the International Monetary Fund in the coming days to discuss the plan.
Bukele also indicated that the government may promote bitcoin mining. El Salvador had already been hoping to draw businesses with excess geothermal energy, and while the government isn’t specifically looking to the bitcoin mining industry to fill that need, it is one such sector that could benefit, he said.
He sees the move as a way of encouraging foreign investment in El Salvador, saying at the time that if just 1% of the world’s Bitcoin were to be invested in the country, “that would increase our GDP by 25%.”
El Salvador is a low-income country that relies on remittances from nationals abroad. It is hoped that the adoption of the blockchain currency will ease and reduce the costs of those transfers. The country uses United States dollars as its official currency.
The rollout would be handled by the mobile payments app Strike, which recently debuted in El Salvador.
Bukele said that the majority in the country do not have traditional bank accounts, and that the new law will enable people to create online digital wallets with just a smartphone.
The adoption puts El Salvador on the spotlight as many other countries will look up to its success to determine whether to approve bitcoin as a legal tender or not.
However, concern of volatility remains. A significant drop in the price of bitcoin will mean most holders losing value for their money, and that will discourage wider acceptance.