El Salvador: High debt, high murder rate and high poverty rate behind Bitcoin becoming legal currency

Amid doubts and praise, El Salvador became the first country in the world to recognize Bitcoin as legal tender. On June 9, Nayib Bukele, President of the Republic of El Salvador, tweeted that he had officially submitted a Bitcoin bill to the country's legislature, which was passed by an absolute majority vote. El Salvador became the first country in the world to recognize Bitcoin as legal tender.

Behind this radical monetary experiment is an adventure by the young president of El Salvador, a Central American country that has been under pressure from long-term high murder rates, high debt rates and high poverty rates.

A country with “three highs”

El Salvador is located in the northern part of Central America, with a land area of ​​just over 20,000 square kilometers, equivalent to 1.2 times the size of Beijing; its total population is approximately 6.7 million, which is one-third of Beijing's permanent population.

Historically, El Salvador was once the homeland of the American Indians. Later, due to long-term colonial occupation, El Salvador has become a multi-ethnic, multi-lingual, multi-faith country with a turbulent political atmosphere, which has led to a long period of economic downturn. In order to survive, many people have turned to crime.

There are many gangs in El Salvador. In January 2015, the country's president announced a major crackdown on street gangs, but 3,400 people were still murdered between January and July.

El Salvador has one of the highest murder rates in the world.

The website of the Chinese Embassy in El Salvador reminded Chinese citizens in El Salvador in 2019 that "the domestic security situation in El Salvador is unstable, and there are many cases of theft and robbery."

El Salvador is mainly agricultural with a weak industrial base. In recent years, affected by the international economic and financial crisis, economic growth has been slow.

The sudden outbreak of the epidemic in 2020 made El Salvador’s already fragile economy even more vulnerable.

According to the latest report released by international rating agency Moody's, "Central America: The Impact of the COVID-19 Pandemic on Fiscal Accounts and Public Debt Levels," El Salvador is one of the countries with the greatest fiscal pressure in Central America under the epidemic.

Data released by the Economic Commission for Latin America and the Caribbean from January to September 2020 showed that among the 12 countries surveyed in Latin America, El Salvador's fiscal deficit rate had reached 8.1%, second only to Brazil's 12.3%.

The International Monetary Fund predicts that in 2021, the Salvadoran government will be the second most indebted country in Latin America, second only to Brazil.

A report released by the El Salvador Economic and Social Development Foundation shows that due to a series of impacts brought about by the new crown pneumonia epidemic, the country's poverty rate will rise from 31% to 41% in 2020, and poverty will become more widespread.

The foundation said it estimated that about 225,000 people would be unable to find jobs, that this deterioration in social welfare had not occurred in 40 years, and that the country's economic recovery would be "very slow."

Faced with the worst economic situation in 40 years, Bukele is pinning his hopes on cryptocurrencies.

The Adventures of a Young President

President Bukele, who promoted this monetary experiment, ran for election on behalf of the Grand Alliance for National Unity on February 3, 2019. He was elected president with more than 53% of the votes and took office on June 1 of that year at the age of 37.

Born in the 1980s, Bukele is of Palestinian descent and was elected mayor of Nueva Cazcutlan in 2012 on behalf of the Marti Front. He was also elected mayor of San Salvador in 2015.

In October 2017, he formed the "New Thought Party" and announced his participation in the 2019 presidential election. Because the "New Thought Party" failed to complete the registration procedures on time, he participated in the general election in July 2018 as a candidate of the National Unity Grand Alliance, the third largest party in parliament.

Early in his term, Bukele fired the attorney general and five other corrupt local judges. And within a month, the El Salvadoran Congress approved new education and infrastructure financing plans and passed bills to ensure that business elites who had bought politicians in the past would be restrained.

In Bukele's view, the state has an obligation to promote and protect private enterprise and create the necessary conditions for increasing national wealth to benefit the broadest population. The state has an obligation to promote the financial inclusion of its citizens to better protect their rights.

Making Bitcoin legal tender is a new attempt by the young president to save the country's economy.

Bukele believes that “in order to promote the country’s economic growth, it is necessary to authorize the circulation of a digital currency whose value fully complies with the standards of the free market in order to increase national wealth and benefit the largest number of residents.”

Before 2000, El Salvador had its own currency, the colon, but due to severe inflation, the monetary system eventually collapsed.

The US dollar was adopted as legal tender by Legislative Decree No. 201, Volume 349, of the Official Gazette No. 241, dated December 22, 2000.

According to statistics from the Central Bank of El Salvador, 90% of the currency currently in circulation on the market is in U.S. dollars, and the colon has almost been left aside.

By officially legalizing Bitcoin, Bukele hopes to stabilize El Salvador's economy. In order to attract investment, Bukele also said that El Salvador will grant permanent residency to immigrants who invest 3 Bitcoins (about $102,000).

The content of the Salvadoran Bitcoin Act shows that its purpose is to regulate Bitcoin as an unrestricted legal currency, with the power of free circulation and no restrictions in transactions between any public or natural or legal persons.

The exchange rate between Bitcoin and the U.S. dollar will be determined freely by the market; prices can be denominated in Bitcoin; taxes can be paid in Bitcoin; Bitcoin transactions will not be subject to capital gains tax, just like any fiat currency; for accounting purposes, the U.S. dollar will be used as a reference currency; and every economy must accept Bitcoin when someone who wants goods or services offers him payment.

In addition, the State will promote the necessary training and mechanisms to enable people to trade in Bitcoin. The Executive Branch will establish the necessary institutional structures to implement this law.

Bukele believes that making Bitcoin a legal tender will create jobs in the short term and provide financial services to people outside the main economy. El Salvador is still a cash-based economy, with about 70% of the people without bank accounts or credit cards and no access to traditional financial services.

Currently, remittances from Salvadorans working abroad account for a large part of the country's economy, equivalent to approximately 22% of the country's GDP. According to official reports, the total amount of remittances to the country reached $5.9 billion in 2020. International transfers usually charge fees of 10% or more, and using Bitcoin can avoid "millions of dollars in losses" during the remittance process.

Although El Salvador has become the first country in the world to designate Bitcoin as legal tender, there are still many uncertainties about the development prospects of Bitcoin in El Salvador.

In recent years, the Bitcoin network has been in a state of congestion, and its ability to process on-chain transactions has reached its upper limit. Its transaction fees are often tens of dollars, which is obviously unaffordable for most Salvadorans.

At the Bitcoin 2021 conference in Miami, Bukele announced that El Salvador has partnered with Lightning Network payment platform Strike to use Bitcoin technology to build the country's modern financial infrastructure.

The Lightning Network is a second-layer payment protocol that runs on top of the Bitcoin network, enabling instant transactions and affordable transaction fees. In March, Strike launched its mobile payment app in the country, which quickly became the most downloaded app.

In addition, Bitcoin's legal currency status is closely linked to the stability of Bukele's personal political career. According to the country's laws, Nayib Bukele, who came to power in 2019, will serve until 2024 and cannot be re-elected.

In an interview with the media, Wang Yongli, former vice president of the Bank of China, believes that some countries that lack sovereign currencies lack the most basic understanding of currency. Using completely decentralized digital encrypted assets such as Bitcoin as legal tender will inevitably seriously disrupt economic and social operations due to their own sharp price fluctuations. The country has no means of regulation and can only seek its own destruction.

He emphasized that El Salvador's announcement of using Bitcoin as legal tender has excited people in the cryptocurrency circle, but expectations may be too high.