First Bitcoin Country

VeradiVerdict - Issue #155

Last month, El Salvador became the world’s first country to adopt Bitcoin as legal tender.

While I’m not surprised to see a foreign government embrace the currency—this was a matter of when, not if—it is still a pretty remarkable moment for our industry. As such, it’s worth diving a little bit deeper into what exactly we’re seeing and what it may spell for the future.

El Salvador’s “legal tender” proclamation.

On June 5th, rumors began to circulate that later that afternoon, Jack Mallers, CEO of the Bitcoin-powered payment company Strike, would be making an important announcement at the Bitcoin conference in Miami. “Easily the biggest announcement in the last few years,” Anthony Pompliano called it.

Later that day, in an emotional keynote, Mallers unveiled the news: El Salvador was adopting the currency as legal tender and promoting a number of other pro-blockchain initiatives. A pre-recorded message from Nayib Bukele, president of El Salvador, confirmed these plans to turn the nation into the “first Bitcoin country.”

A few days later, on June 8th, the “Bitcoin Law” was sent to Congress. It quickly passed; 62 members were in favor, 19 were opposed, and 3 abstained.

So what does the law actually say? It’s worth reading the full text, but here are the highlights:

  • Financial inclusion is a core responsibility of the government. See (4): “That it is the obligation of the state to facilitate the financial inclusion of its citizens in order to better guarantee their rights.” And (5): “That in order to promote the economic growth of the nation, it is necessary to authorize the circulation of a digital currency whose value answers exclusively to free-market criteria, in order to increase national wealth for the benefit of the greatest number of inhabitants.”

  • Bitcoin is declared as legal tender. This means that taxes can be paid in Bitcoin and, importantly, “[e]very economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service” (Article 7). In addition, capital gains on Bitcoin will not be taxed.

  • The government will attempt to make “Bitcoinization” as smooth as possible. This includes state-guaranteed convertibility to USD (Article 8) to reduce volatility risk, as well as an Article 7 exemption (requirement to accept Bitcoin) for those who “do not have access to the technologies that allow them to carry out transactions in bitcoin.”

The law goes into effect on September 7th. 

While many commentators expect for there to be slight changes to the law’s mandates—in particular, clarification on the controversial Article 7—Bukele’s vision of a firmly pro-Bitcoin El Salvador seems to be unfolding as planned. It is now clear that this is not just some PR stunt; it is a substantial (and complex) change to El Salvador’s financial future.

In addition to the “Bitcoin Bill,” El Salvador has implemented a number of other pro-Bitcoin policies:

  • An investment of 3 BTC (~$100k USD as of writing) into El Salvador qualifies the investor for permanent residence in the country. This is the first “golden visa” to be denominated in BTC.

  • Promised $30 in BTC to each citizen through the nation’s original cryptocurrency wallet, Chivo.

  • Expansion of Bitcoin ATMs, from less than a dozen to over 1500.

  • Leveraging the country’s geothermal energy sources (e.g., volcanoes!) for clean Bitcoin mining.

Why did El Salvador do this?

There are a few important things to understand about El Salvador’s current financial conditions:

  • 29% of citizens have an account at a financial institution, with only 11% saving in the past year.

  • 24% have made or received a digital payment in the last year.

  • Mobile Connectivity Index (MCI) of 53.8, on the lower-end of Central and South American countries.

In short, there’s a long way for the nation to go in financializing its citizens—the internet and banking infrastructure lags behind peer countries. So why embrace Bitcoin so early?

The first possible reason is geopolitical. Since El Salvador doesn’t have a national currency, their economy has largely dollarized; giving citizens more currency options, such as Bitcoin, could be useful in mitigating their reliance on the Fed’s policies. Moving forward, other “dollarized countries” are low-hanging fruit for experimenting with cryptocurrencies.

Second, by being a “first mover” on Bitcoin, they’re hoping to encourage entrepreneurs to build the future of finance in El Salvador, not somewhere else. This seems to already be working: Strike, Mallers’ company, has already set up shop in the country’s so-called “Bitcoin Beach,” with more crypto startups to follow suit.

Lastly, it is my sincere hope that Bitcoin (in the short-term) and open finance (in the long-term) can truly put more financial power in the hands of Salvadorans. From remittances to micro-lending, there are a number of real ways that blockchain technology can make the nation less dependent on American central bank policy and more prosperous overall. For over half of Salvadorans, Bitcoin will be their first “bank account.” While the first few months (or years) of the nation’s Bitcoinization will likely be less transformative than some advocates expect, this achievement on its own is significant.

We should be cautious, though, not to paint Bukele, a ruler with authoritarian tendencies, as a “Bitcoin messiah.” Bukele chose to endorse Bitcoin instead of other, less free options, and he deserves some credit for that. But Bitcoin doesn’t have a messiah—that’s the whole point. And while this is a milestone for the community, it’s important to remember that the Bitcoin network is unphased. If Bukele decides to ban Bitcoin and institute a surveilled CBDC instead, Bitcoin’s censorship-resistance and “rules without rulers” will survive. Government support for cryptocurrencies certainly makes the project of open finance easier—and it’s something we should work towards—but it’s not a requirement.

This transition for El Salvador won’t be as easy as saying “Bitcoin fixes this”; it will take time, hard work, and a few bumps along the road. But it is my belief that this is a step in the right direction for El Salvador and for the world. I’m looking forward to seeing how it continues to develop.

Other countries on the horizon.

In response to El Salvador’s move, a number of other regional policymakers have already made moves to encourage cryptocurrency innovation in their own countries.

Paraguayan Congressman Carlos Rejala, for example, has recently become a strong Bitcoin advocate, making a number of tweets in support of the currency. "We want to be a crypto-friendly country,” he said. This week, those words turned to action when Rejala introduced a cryptocurrency bill to Congress. While it won’t go as far as making Bitcoin legal tender, it will make regulatory compliance much easier for crypto companies and spur clean mining projects from the Yaciretá and Itaipú plants. Last month, Universidad Americana, a prominent university, and Grupo Cinco, Paraguay’s largest entertainment company, also began to accept crypto payments.

Gabriel Silva, a Panamanian politician, announced that he was going to be introducing a similar proposal to Bukele’s in Panama. In a strong show of support, he said: “This is important. And Panama cannot be left behind. If we want to be a true technology and entrepreneurship hub, we have to support cryptocurrencies.”

Mexico, which has a better crypto regulatory scheme than most, also shows signs of stepping up its support of the technology. Eduardo Murat Hinojosa, a lawmaker, said that he would be “promoting and proposing a legal framework for crypto coins in Mexico’s lower house.” Ricardo Salinas Pliego, a Mexican billionaire, made headlines last month for saying that “fiat is a fraud.” In a subsequent tweet, he also said: “I recommend the use of Bitcoin, and me and my bank are working to be the first bank in Mexico to accept Bitcoin.”

There’s still a long way to go, though. Colombia has a banking ban on cryptocurrencies. Bitcoin is still downright illegal in Ecuador and Bolivia. Hostile nations exist in every geography, though; it’s only a matter of time before the world comes to terms with this new reality, even if it’s a slow (and uncomfortable) transition. El Salvador, hopefully, serves as a slight nudge in that direction.

The bottom line.

El Salvador’s embrace of cryptocurrency is one of the industry’s most exciting recent developments, in my opinion, and I’m thrilled to watch the nation’s Bitcoinization. The rest of the region (and the world) is watching: if adopting Bitcoin translates to a better quality of life for Salvadorans, other countries will be inclined to follow suit—this could be the first domino to fall in the decades-long normalization of cryptocurrency everywhere. 

However, it’s also important not to set the stakes unreasonably high. This “Bitcoin experiment” has the potential to quickly expand financial access and overall quality of life for Salvadorans. But let’s not forget that El Salvador is a country with relatively weak financial and technological infrastructure, two important conditions for early cryptocurrency adoption. It could easily be a slow, politically-motivated, and disappointing process, and we need to prepare for that possibility. 

Ultimately, whether or not Bitcoin “works out” in El Salvador doesn’t change anything about the core technology or its potential. Let’s celebrate this moment, assist El Salvador’s transition as best we can, and then put our heads down and keep building for a decentralized future.

- Paul V

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ABOUT ME

Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.