Legal tender in El Salvador: First the U.S. dollar, and now Bitcoin

Kat friend Francisco Martínez summarizes the main points of the Bitcoin law recently enacted in El Salvador.

On June 8, 2021, the Legislative Assembly of El Salvador adopted the Bitcoin Law, which will enter into force on September 9, 2021. The law aims to promote economic growth for the country and to facilitate greater financial inclusion of its population, 70% of which does not have access to traditional financial services.

The Bitcoin Law seeks to create basic rules for the use of Bitcoin and consists of 16 articles, which can be summarized as follows:

1. Bitcoin is established as legal tender, adding it to the United States dollar, which was adopted in 2001 (the Salvadoran Colón is a legal tender in El Salvador, pursuant to the Monetary Integration Law, but in practice it is not in current use).

2. All prices can be established in Bitcoin. This is optional and it is left to the discretion of economic agents whether to continue to price in dollars, or to establish some type of price in Bitcoin.

3. Bitcoin may be used for the following:

a. Pay taxes.

b. Pay for goods and services. Bitcoin must be accepted as a form of payment except when it is clear that an economic agent does not have access to the technology that allows the transaction be made in Bitcoin.

c. The law provides that Bitcoin can be used to make payment of a transaction even if such transaction was entered into before the entry into force of this law.

4. Despite the option to price and pay in Bitcoin, accounting records must always be kept in dollars. There are still no criteria on how to reflect in accounting the value of the virtual currency such that further regulations will be required.

5. The following rules shall apply on exchange, fluctuation and management:

a. The exchange rate will be set by the market.

b. The profit generated by exchanging Bitcoins for dollars will not be subject to the payment of capital gain tax.

c. The government will provide methods for automatic convertibility, which are expected to be anchored in a regulation that must be adopted before the new law enters into force.

d. The Bitcoin Law includes the creation of a trust that will be managed by BANDESAL (State Bank) as well as the formation of a government platform that will enable users to receive and exchange Bitcoins, and convert them into dollars. The trust will facilitate the government platform and assist users who do not want to accept Bitcoins to exchange the Bitcoins received into dollars.

Finally, it is provided that the new law, being lex specialis, will prevail over any other provision that might conflict with it. Because the new law only sets out basic principles for implementation, it is expected that, during the next few weeks, necessary procedures and regulations will be further addressed.

Picture on lower left is by Coinmarket.to and is licensed under a Creative Commons Attribution-Share Alike 4.0 International license.