Today El Salvador was the first country to adopt Bitcoin as a recognized currency.
But this takes us back to the fundamental question of what is money? Why would a country adopt a currency that is as volatile as bitcoin? It’s not an effective store of value, and its usefulness as a means of exchange is improving all the time, but is still difficult.
El Salvador made the announcement in June a crypto currency conference in Miami to adopt bitcoin as an additional currency. The President of El Salvador said that the reason for adopting crypto was the short term benefit of creating jobs and provide financial inclusion to thousands of people outside the formal economy.
The country has been using the USD since 2001. Before that, the local currency was called the Colon which had been in use since 1892. But when El Salvador adopted the USD in 2001, they didn’t remove the Colon as a valid legal tender.
The majority of citizens are opposed to having their wages denominated in bitcoin due to the extreme volatility of the currency against the USD and other major currencies. There is real fear that the purchasing power can be eroded overnight. Furthermore, while you can pay your taxes in bitcoin, so far, the Salvadoran government has said that taxes will be calculated in US dollars
El savador is a poor country. There is a large percentage of the population that don’t own a cell phone, and many who do own a cell phone cannot afford a data plan. So using a digital wallet without a data connection is clearly problematic.
So when I hear the president of El Salvador speak, what I’m hearing is that they are having a hard time even observing the economy. Much of the economy is happening in cash, with no income reporting to central tax authorities. It’s hard to tax transactions you can’t see. Is the person bartering a chicken for a basket of mangos going to pay tax on the sale of the chicken? I doubt it. If they’re paying in cash in US dollars, are they going to inform the tax authorities?