El Salvador is a small Central American country with about 7 million population. It had a tumultuous political period including a 14-year civil war ending in 1992 with the Chapultepec Peace Accords.
Its legal tender currency was the Salvadoran colon. In 2001 the U.S. Dollar replaced the Salvadoran colon as the legal tender of El Salvador. At that point, the country effectively relinquished control over its monetary policy because they cannot regulate the supply or circulation of the U.S. Dollar.
In 2019, Nayib Bukele, of the populist Nuevas Ideas party, was elected president after years of dominance of 2 other parties. Bukele performs very well in popularity polls. In the 2021 legislative elections, the Nuevas Ideas party took control of the parliament.
The New Law
At Bukele’s urging, the Parliament passed the Bitcoin Law on June 9, 2021. It made it a legal tender effective September 7, 2021. Why? That’s the big question because at this point it is very unpopular.
The professed rationale is that it will boost the economy. That it might do. Remember, when they adopted the U.S.Dollar as its legal tender it effectively relinquished its control over monetary policy. With the legalization of crypto they seemingly seek to restore some monetary policy. It has already started to do that.
They are launching the program by giving out to anybody who wants it $30 worth of Bitcoins. Also, they are spending $1 million to distribute and install new ATM machines that will dispense Bitcoin in exchange for USD. They are effectively increasing the money supply in a way they could not do with USD.
The problem with the policy is that it assumes the public will be willing to use it – to spend it. Early polls show that the public is not receiving it enthusiastically. More than 68% of those polled recently opposed the new law. A sizable percentage of those polled didn’t have a clue what it is.
But time will tell. Other countries have the USD as their legal tender, including Panama and Equator. It is reported that Panama is closely monitoring El Salvador’s experiment. For perhaps the same reason, Panama is considering a similar legislative move to adopt the cryptocurrency as a legal tender.