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World First: El Salvador makes bitcoin legal tender

Context:

El Salvador became the first country in the world to adopt bitcoin as legal tender after the country’s Congress, approved President Nayib Bukele’s proposal to embrace the cryptocurrency, a move that delighted the currency’s supporters.

Relevance:

Prelims, GS-III: Science and Technology (Blockchain technology), GS-I: Geography (Maps)

Dimensions of the Article:

  1. About El Salvador
  2. About Bitcoin
  3. Why did El Salvador approve use of Bitcoin?

About El Salvador

  • El Salvador is a country in Central America bordered on the northeast by Honduras, on the northwest by Guatemala, and on the south by the Pacific Ocean.
  • For millennia, the region was controlled by several Mesoamerican nations, especially Lenca, Mayans, then later the Cuzcatlecs.
  • In the beginning of the 16th century, the Spanish Empire conquered the Central American territory, incorporating it into the Viceroyalty of New Spain ruled from Mexico City.
  • From the late 19th to the mid-20th century, El Salvador endured chronic political and economic instability characterized by coups, revolts, and a succession of authoritarian rulers.
  • El Salvador’s economy has historically been dominated by agriculture, beginning with the Spanish taking control of the indigenous cacao crop in the 16th century, with production centered in Izalco, and the use of balsam from the ranges of La Libertad and Ahuachapan.

Click Here to read more about Cryptocurrencies

About Bitcoin

  • Introduced in 2009, it is a type of cryptocurrency that enables instant payments to anyone.
  • Bitcoin, Ethereum, Ripple are a few notable examples of cryptocurrencies. Bitcoin is based on an open-source protocol and is not issued by any central authority.
  • Originally, Bitcoin was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties.

Why did El Salvador approve use of Bitcoin?

El Salvador relies heavily on money sent back from workers abroad.

  • Bitcoin adoption may make these remittances quicker and cheaper.
  • It is also expected to boost financial inclusion in their country as the majority of the population does not have access to formal banking channels.

Impact of El Salvador’s approval of Bitcoin

  • In the absence of a central regulating authority, legalizing bitcoin will have potential for fraud and money laundering, high energy costs and extreme volatility.
  • This could potentially encourage other smaller countries with weaker economies to open up to crypto as an alternative to fiat currencies, paving the way for mainstream future adoption worldwide.
  • Already, Venezuela and many African countries have started using cryptocurrencies as a long-term store of value, as their currencies are deflating quickly.

-Source: The Hindu

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September 2022
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