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A brief review of El Salvador’s “Bitcoin Law”

  • by: Emile Phaneuf
  • On: 14, Jul 2021
16 min read
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On 8 June 2021, the El Salvadorian Legislative Assembly passed a bill, which has now become law, that makes Bitcoin legal tender within the country. The law is formally known as “Ley Bitcoin” or “Bitcoin Law”. To make the details of it as clear as possible – what is and is not in it – to those of us living outside of El Salvador, I have provided English text of each article as well as a very brief analysis of the implications of each article from my personal viewpoint, wearing an economist’s hat.

Note that the law comes in two sections: “General dispositions” (ten articles) and “Final and transitional dispositions” (six additional articles). I had read the official announcement by the El Salvadorian Legislative Assembly in Spanish (which lists only the first ten articles), the “General dispositions”, and translated them into English before later discovering that President Nayib Bukele published an English translation on his Twitter account with the additional six remaining articles, so I will use his own translations.

On the far left column of the table, my thumbs up or down indicate whether I consider the law’s articles to be favourable for the people generally in El Salvador. Some articles do not merit either a positive or negative reaction on my part, and for those, I just put “–”. To be upfront about the criteria I use to judge whether I consider an article to be good or bad, my general rules are:

  1. Opening up options for participants in a market is good.
  2. Competition in markets is good (including in money); monopoly is bad (including in money).
  3. “Good” and “bad” should be judged by how a law (or any part of it) affects everyday people rather than how effectively it protects incumbent banks, central banks, politicians, or their buddies.

Enjoy.

👍/👎

Article No.

Official text

My commentary

(if any)

GENERAL DISPOSITIONS

👍

I

The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.

What is mentioned in the previous paragraph does not hinder the application of the Monetary Integration Law.

 

👍

II

The exchange rate between bitcoin and the United States dollar, subsequently USD, will be freely established by the market.

Dual legal tender can work just as long as exchange rates between USD and bitcoin remain free-floating.

Governments have attempted repeatedly to fix exchange rates between one asset and another, each time relearning Gresham’s law in the process. This monetary standard (“bimetallism”) was more famously applied between gold and silver.

Gresham’s law is usually described as “bad money drives good money out of circulation” but was more appropriately rephrased by the late economist Murray Rothbard: “Money overvalued by the State will drive money undervalued by the State out of circulation”.[1]

👍

III

Prices may be expressed in bitcoin.

It is good that this is allowed (yet not required), but any bitcoin prices expressed will, probably for several years, be converted from the fluctuating USD rate. As Vijay Boyapati noted, money’s functions evolve in stages: first as a collectible, then as a store of value, then as a medium of exchange, and then as a unit account. Bitcoin, as of 2021, has arrived at the first three stages already but not the fourth – as it is still too volatile.

👍

IV

Tax contributions can be paid in bitcoin.

This has the potential to simplify things a great deal for Salvadorans: allowing them flexibility.

👍

V

Exchanges in bitcoin will not be subject to capital gains tax, just like any legal tender.

Even excluding the paying of taxes itself, merely calculating taxes correctly (especially on cryptocurrency) is an enormous burden for people in countries that tax every instance in which cryptocurrencies are sold, spent or traded. Even if the El Salvadorian government had not required bitcoin’s acceptance by economic agents (see article VII), this article (V) alone is likely to do a great deal to encourage bitcoin’s voluntary widespread adoption.

👍

VI

For accounting purposes, the USD will be used as the reference currency.

Bitcoin’s volatility does not yet allow for it to be used as a reliable unit of account.

👎

VII

Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.

For various reasons, I do not view this article favourably. For one, many people in El Salvador have likely never used bitcoin. And for another, many people may just not trust themselves with the private keys to their wallets (a major problem for many users). Allowing bitcoin’s use or even encouraging it is one thing; requiring it is another. If bitcoin can stand on its own two feet (and I think that it can), its use need not be mandatory.

Note that Article XII makes an exception for economic agents that do not have access to necessary technology that would enable bitcoin.

See also President Nayib Bukele’s defence of this article, in his own words (and in English).

👍

VIII

Without prejudice to the actions of the private sector, the State shall provide alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from bitcoin to USD if they wish. Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

On one level of analysis, we must say that if the state requires Article VII, then it must provide Article VIII. Thus, my “thumbs up” rating.

On another level of analysis, no entity (including the State) can do anything at zero cost, so for what it is worth, even the State’s training has an impact on the economy. Perhaps a better way to go about this would be merely (again) to allow bitcoin’s use rather than requiring it. (Although one can argue that the training could have a positive effect for the people of El Salvador in the medium to long term).

IX

The limitations and operation of the alternatives of automatic and instantaneous conversion from bitcoin to USD provided by the State will be specified in the Regulations issued for this purpose.

Where are these regulations? Without seeing them, a complete analysis is impossible.

X

The Executive Branch will create the necessary institutional structure to apply this law.

Without knowing the institutional structure, a complete analysis is impossible.

 

FINAL AND TRANSITIONAL PROVISIONS

XI

The Central Reserve Bank and the Superintendency of the Financial System shall issue the corresponding regulations within the period mentioned in Article 16 of this law.

Many bitcoiners are anti-central bank. I will spare the reader such comments from me. But for those interested in the background on this, see my article on this: “The Known (and possible) Influences of Satoshi Nakamoto Part 2 – Economic and Philosophical Origins”.

👍

XII

Those who, by evident and notorious fact, do not have access to the technologies that allow to carry out transactions in bitcoin are excluded from the obligation expressed in Art. 7 of this Law. The State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

This exemption is important for some of the reasons I identified in my comments for Article VII.

👍

XIII

All obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin.

Without Article VIII, this article would be a huge burden to many payees that happen to prefer dollars.

👎

XIV

Before the entry into force of this law, the State will guarantee, through the creation of a trust at the Banco de Desarrollo de El Salvador (BANDESAL), the automatic and instantaneous convertibility of bitcoin to USD necessary for the alternatives provided by the State mentioned in Art. 8.

If we are to move away from a monopoly on money and to embrace competition in currency, a better scenario would involve competing private providers here rather than an established State monopoly on money conversion. This would also provide an added layer of privacy and reduce the possibility of financial censorship – allowing consumers to switch from one private provider to another if they do not feel well-served by one or the other.

I will borrow a quotation from George Selgin’s book Good Money. Selgin refers here to the issuance of money, but I will apply it more broadly to even the convertibility of it:

“...[It] is not that private enterprises are necessarily better than public ones at supplying the means of exchange, or financial assets of any sort. It is that competition beats monopoly, because the prospect of failure supplies competing firms with a powerful incentive to desist from putting out shoddy merchandise”.[2]

XV

This law will have a special character in its application concerning other laws that regulate the matter, being repealed any provision that contradicts it.

 

XVI

This decree will take effect ninety days after its publication in the Official Gazette.

In other words, the law becomes effective as of 7 September 2021.


[1]Rothbard (2004, pp. 898-899).

[2]Selgin (2008, p. xvi).

References:

Rothbard, Murray N. (2004), Man, Economy, and State with Power and Market, 2009.

Selgin, G. (2008), Good Money: Birmingham Button Makers, The Royal Mint, and the Beginnings of Modern Coinage, 1775-1821, Oakland, The Independent Institute, 2011.

Image courtesy of https://voi.id

 

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