Understanding Bitcoin
This news is trending globally. El Salvador turns out to be the first country in the world to use Bitcoin as legal currency. But first of all, let’s dig deeper into the concept of Bitcoin to understand better how it may impact the country over time.
What is Bitcoin all about?
Bitcoin, also known as a virtual or digital currency, is an online version of cash. And most interestingly, this cryptocurrency is neither controlled by the government nor by financial institutions. It is actually controlled by all the Bitcoin users around the world where they are free to choose what software and version they want to use. However, to stay compatible with each other, all users are required to use software complying with the same rules, normally referred to as the blockchain protocol. In simpler terms, Bitcoin can only work correctly based on the principle of consensus rather than a unilateral decision.
Potential benefits of Bitcoins
In the world of Bitcoins, each user is provided with a personal digital wallet, which can be referred to as a ‘virtual bank account’, allowing them to send or receive bitcoins and also buy goods easily. Similarly, under the law of El Salvador, the citizens will be allowed to use bitcoins for purchases, paying off debts and tax payments while bitcoin exchanges will not be subject to capital gains tax. Moreover, a study conducted by the Pew Research Center indicates that around 20% of the country’s GDP comes from remittances, money sent home by Salvadorans staying abroad (Deutsche Welle, 2021). In this case, Bitcoins can be of great advantage to them as they do not have to face issues like paying high fees to traditional banks and money transfer services or facing delays in transactions.
Potential Downsides of Bitcoins
Nevertheless, the adoption of bitcoins may also lead to disadvantages for the locals. There are concerns that the lower class will not have access to the technology needed for the usage and storage of bitcoins. Since bitcoins are not the only currency used in the country, there might be chances for more people to opt for dollars rather than bitcoins in return for their products and services. However, the law does say that the government will “provide the required training and mechanisms” to encourage the population to use this digital currency.
