El Salvador and Bitcoin: Legal Tender or Compulsory Tender?

David Birch, the author, adviser and investor in digital financial services, has recently posted an article on Linkedin, ‘Why would anyone think it is a good idea?’. His piece was about El Salvador’s decision to make Bitcoin legal tender or, in David’s words, ‘compulsory tender’. His argument is that shop keepers could always have accepted Bitcoin, but now they have to.

The devil, of course, is in the detail. The discussion in the chat around David’s post pointed out that merchants can be paid in Bitcoin but receive the funds automatically in US dollars, meaning that this ‘compulsion’ is of no consequence. The law says, ‘Art 7. Every economic agent must accept bitcoin payment when offered to him by whoever acquires a good or service’. but Art. 12. provides exemptions from this requirement to those who ‘do not have access to the (necessary) technologies’.

Except, of course, the Chivo national crypto wallet is available to anybody with a phone and power. Larger organisations will need something more than that of course. Time will tell how those articles will be interpreted, but certainly an experiment has begun which will need some time to play out before we know the outcome.

Importance of remittance fees in the move to Bitcoin

El Salvador’s decision to make Bitcoin legal tender is much in the news more generally. A recent CNBC article focused on the importance of remittances in the decision to make Bitcoin legal tender. Remittances sent back to El Salvador are said to be $6 billion each year, 23% of GDP. There are about 2.5 million El Salvadoreans overseas and it is estimated 70% of the population receive remittances. The average transfer value each month is $195 which, with the minimum wage at $365, is a significant part of family incomes. 60% of transfers use remittance companies, 39% through banks.

About $400 million is paid in fees associated with these remittances to companies such as Western Union and MoneyGram, and it is these which the country’s president, Nayib Bukele, aims to reduce.

In addition to the fees, paying remittances using a remittance company can be slow – a three-day transfer - and expensive. The fee structure depends on the sum being transferred, as high as 33% for $10. If the new Chivo app is used, transfers are free.

200 Chivo ATMs have been installed where people can withdraw the money (in US dollars). Chivo allows transfers in US dollars or Bitcoin, so people can experiment safely with a currency they know. To encourage its use, El Salvadoreans receive $30 worth of Bitcoin for downloading the app.