Can Bitcoin become legal tender? Can El Salvador's cyberpunk dream be realized?

This article is from Block Rhythm, with the original title: "Bitcoin Becomes Legal Tender, Can This Country's Cyberpunk Dream Come True?"

In the ideal world of cyberpunk mystery, what is the most suitable legal tender? Bitcoin may be the top choice.

Recently, this cyberpunk dream has come closer to reality than ever before.

On June 6, Salvadoran President Nayib Bukele announced at the Miami Bitcoin 2021 conference that he would submit a bill to the country's parliament next week to make Bitcoin a legal payment method.

If the bill is approved, it means that El Salvador will become the first country in the world to adopt Bitcoin as legal tender.

Subsequently, President Bukele also retweeted a post by cryptocurrency "king of topics," Tron CEO Justin Sun, about "crypto investors and entrepreneurs moving to El Salvador," analyzing four major benefits for crypto entrepreneurs in El Salvador:

1. A suitable climate, world-class surfing beaches, and beachfront properties for sale;
2. One of the few countries in the world without property taxes;
3. No taxation on Bitcoin gains, as Bitcoin will become legal tender;
4. Crypto entrepreneurs can obtain permanent residency instantly.

This news has invigorated the crypto industry, with Binance CEO Changpeng Zhao and Justin Sun responding from afar, and news about El Salvador began to flood Twitter's crypto circle.

However, most people's first reaction is, what is El Salvador like?

Redefining El Salvador

El Salvador, a small coastal country located in northern Central America, has an area of over 20,000 square kilometers, roughly equivalent to 1.2 Beijings, with a total population of about 6.7 million, approximately one-third of Beijing's permanent resident population.

As a "lower-middle-income country" with an economy based on agriculture, El Salvador has experienced a 12-year civil war and is known for poverty and gang violence, with over 3,400 murders in just seven months, making it "one of the most dangerous countries in the world."

Economically, El Salvador has not issued its own independent sovereign currency and has always settled in U.S. dollars, with the issuance and regulation of dollars entirely determined by the United States, leaving El Salvador to obediently depend on it, making true independence impossible.

Now, this tiny country has made global headlines with its new president's astonishing statements, gaining close attention from the crypto industry.

After the news broke, some Salvadoran netizens expressed their admiration for the new president on Reddit. A user named RussianRadium wrote that this forward-thinking president has brought change to El Salvador, redefining the country's international image.

Through this user's description, we may glimpse the current situation in this country:

Salvadoran President Nayib Bukele is 39 years old this year, and his organization is mainly composed of young professionals who are tired of the corrupt system that has kept El Salvador poor and underdeveloped for the past 30 years. He dismissed the Attorney General (who had been protecting other corrupt politicians) and five other corrupt local judges early in his term. Within just a month of taking office, the Salvadoran Congress approved new financing plans for education and infrastructure and passed a series of bills to ensure that the predatory business elites who had previously bought politicians would be restrained. Many large infrastructure projects are expected to receive congressional approval soon, including the construction of a high-speed railway and a new international airport.

Currently, one of the largest projects under construction in El Salvador is "Surf City," which primarily involves building roads, electricity, and communication infrastructure along the Salvadoran coastline to support small and medium-sized enterprises. For this reason, the International Surfing Association (ISA) has decided to host the World Surfing Games, with the winners qualifying to represent El Salvador at the 2021 Tokyo Olympics. Currently, Bitcoin is widely used by small businesses in El Salvador, especially in El Zonte, a beach town in southeastern El Salvador that is popular with international tourists.

I know most people think of El Salvador as a disaster zone, and we indeed were in the past. However, this country is undergoing tremendous changes. …… El Salvador is no longer one of the ten most violent countries in the world (where there used to be 12-15 murders a day, it has now dropped to nearly 3-4 a day since Bukele took office), and our economy is expected to grow steadily.

……

The use of Bitcoin as legal tender is a huge news for El Salvador. I assure you that Congress will pass this bill. I can't give you an exact date, but the Economic Committee may receive all papers regarding Bitcoin this week for study and discussion.

Cyberpunk Bitcoin Beach

Surprisingly, before the president's statement, Bitcoin had already become one of the payment methods on the El Zonte coast of El Salvador. This project is known as "Bitcoin Beach."

El Zonte is a small village on the Salvadoran coast with 3,000 residents, known for its beautiful beaches and as a paradise for surfers. Under the impact of the COVID-19 pandemic, El Zonte found its unique path through the Bitcoin economy.

According to Forbes, an anonymous donor initially bought Bitcoin at 5-10 cents and stored it on a USB drive for years. After recovering the wallet password in early 2019, he donated a six-figure sum to El Zonte in Bitcoin.

Subsequently, this donor collaborated with El Zonte volunteer Michael Peterson to use the funds to improve the lives of El Zonte residents, but with one condition: Michael Peterson could not convert the Bitcoin into fiat currency. El Zonte residents had to learn how to use Bitcoin itself, thus creating a Bitcoin economy. This is how the "Bitcoin Beach" project was born.

Currently, a common criticism of Bitcoin payments is the high fees and slow network processing speeds. The "Bitcoin Beach" project faced this challenge by seeking new methods. "When transaction costs rise, we turn to the Lightning Network," said Michael Peterson, the founder of "Bitcoin Beach."

The Lightning Network is a second-layer payment protocol that runs on top of the Bitcoin network, enabling instant transactions. "Bitcoin Beach" chose digital wallets as payment tools, allowing local residents to use the Lightning Network to purchase anything from tacos to pay utility bills.

The Dilemmas of Bitcoin Payments

Whether the success of El Zonte can be applied to all of El Salvador is a question that President Nayib Bukele will face in the future.

Currently, the image he presents on Twitter is far from that of a steady national president. After gaining global attention with his Bitcoin statements, it is evident that this president loves to surf the internet.

He changed his Twitter avatar to the crypto community's essential "laser eyes," frequently retweeting and responding to positive comments, declaring El Salvador to be a "land of freedom." From his tweets, it seems that using Bitcoin as legal tender is a smooth path, with everything ready except for the favorable wind.

However, beneath the noise and excitement, shadows are inevitable.

In discussions about Bitcoin payments, the most common issue is the extreme volatility of Bitcoin prices. When residents outside of El Salvador convert their assets into Bitcoin and send them back to their relatives' accounts via the Lightning Network, if the price of Bitcoin drops by 30% in that short time, how will the hard-working residents cope?

Moreover, financial institutions like Wall Street tend to define Bitcoin more as a bulk "commodity" rather than a currency, placing it alongside "gold" and "oil" in the financial system. In a financially imperfect El Salvador, how can local residents use "oil" for daily transactions?

Internally, this new president faces considerable criticism. Reddit user mschweini stated that Bukele's attitude leans more towards populism, as he is replacing El Salvador's judicial institutions with his own loyalists. In an environment rife with gangs in El Salvador, Bitcoin may facilitate illegal activities such as black markets and money laundering.

As a country frequently plagued by civil unrest, Bukele's political career has just begun three years ago, and the legal tender status of Bitcoin is closely tied to the stability of his political career, bringing various uncertainties to the development prospects of Bitcoin in El Salvador.

Externally, El Salvador's use of Bitcoin as legal tender also faces numerous challenges. It is important to note that El Salvador is not the first country to attempt to issue a legal cryptocurrency.

In February 2018, the sovereign nation of the Marshall Islands in the South Pacific announced that it would issue the world's first sovereign legal cryptocurrency—"Sovereign (SOV)." It is reported that this sovereign digital currency would circulate alongside the U.S. dollar, and the Marshall Islands' national parliament has passed this resolution.

However, this resolution was not well received internationally.

In 2018, the International Monetary Fund (IMF) and the U.S. Treasury Department criticized and questioned the Marshall Islands' resolution. In May 2020, the IMF issued an official statement opposing the upcoming issuance of the national digital currency SOV by the Republic of the Marshall Islands.

Similar to the Marshall Islands, Venezuela, which heavily relies on foreign aid, attempted to save itself by issuing a national sovereign cryptocurrency called "Petro," but ultimately failed. Simply relying on Petro could not truly rescue Venezuela's struggling economy.

With the troubled paths of legal cryptocurrencies in the Marshall Islands and Venezuela, can El Salvador, as a small country, rely on Bitcoin to carve out its own independent monetary path?

On June 8, the Salvadoran Minister of Commerce stated to the media that the use of cryptocurrencies would not replace the legal status of the U.S. dollar, and this does not mean economic de-dollarization. Currently, the U.S. dollar remains El Salvador's legal currency, and both parties can choose Bitcoin for payment if they wish, while the dollar remains the pricing standard.

It seems that for Bitcoin to help El Salvador become a country with independent currency and autonomy, the road ahead is still long.