Bukele’s Bitcoin Bet: The Implications of El Salvador’s decision to make Bitcoin ‘legal tender’

Max Shreeve-McGiffen wonders whether El Salvador's decision to make Bitcoin legal tender, the first state to do so, will inspire others to follow suit.

On 8th June 2021, the Legislative Assembly of El Salvador, encouraged by populist President Nayib Bukele and with a ‘supermajority’ of votes, passed the Ley Bitcoin (“Bitcoin Law”). Following this, effective from 7th September 2021, Bitcoin will have the status of ‘legal tender’ in El Salvador. As Art. 7 of the new legislation states, this means that “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service”. As the first sovereign state to grant ‘legal tender’ status to Bitcoin, El Salvador’s legislative framework should be of interest to crypto-enthusiasts and sceptics alike. 

First, the Bitcoin Law is constitutionally convoluted and could cause a serious financial and political crisis in El Salvador. It will certainly have widespread effect for its citizens. Second, it is of great interest to Eurozone observers, as the legislative framework could be replicated in countries like Malta and lead to conflict between the ECB and member states over issues of monetary policy. 

The Constitutional impact in El Salvador

El Salvador is one of about a dozen countries without its own currency. As articulated by John Hawkins in The Conversation, this is constitutionally significant. There is no controversy about losing sovereignty and autonomy over monetary policy, but Bukele’s law still has negative constitutional implications for citizens there. 

For example, under Art. 7 of the new law, “every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service”, potentially violating Art. 23 of El Salvador’s Constitution, which guarantees freedom of contract. The only exception to the Art. 7 provision comes under Art. 12, where it states that “those who … do not have access to the technologies that allow to carry out transactions in Bitcoin are excluded from the obligation expressed in Art. 7”. It is likely that Art. 12 of the Bitcoin Law will offer no protection either - most Salvadorans have smartphones, and the only other “technologies” needed are internet access and an app, which the government plans to supply. El Salvador’s leading opposition party has challenged the Bitcoin Law’s constitutionality – it seems likely to be a political and legal sticking point until September. 

Art 13 could be similarly problematic. Under that provision “all obligations in money expressed in USD, existing before the effective date of this law, may be paid in Bitcoin”. Yet Art. 101 of the El Salvadorian Constitution states that “the economic order shall essentially answer to principles of social justice that tend to ensure to all inhabitants of the country a dignified existence of the human being”. Given Bitcoin’s dramatic fluctuation in value, there could be situations where debts are not paid “according to the principles of social justice”. If the drafters were aware of the possibility of Bitcoin’s fluctuations, it is concerning that no mitigating factors were proposed.

An alternative – the Stablecoin Law

There are some positives in the constitutionalizing of Bitcoin as ‘legal tender’. For example, the ability to send and receive payments quickly, and without a transfer fee, is likely to help the poorest in El Salvadorian society. Given that the World Bank estimates that 20% of El Salvador’s GDP is made up of remittances, and these are usually sent through Western Union, which takes a commission, a means of transferring remittances without commission could improve people’s livelihoods. 

Nevertheless, the risks of the Bitcoin Law specifically outweigh the benefits. If security, privacy, and quick processing speeds were a concern, El Salvador could have adopted a “stablecoin”, rather than Bitcoin. “Stablecoins” are a class of cryptocurrency that offer stability as they are backed by a reserve asset – usually another fiat currency, or gold. For example, had Bukele made Tether legal tender,  which is fixed at the price of one US dollar, El Salvador would have benefitted from the security and decentralization of cryptocurrency without the volatility of Bitcoin. The fact that the Bitcoin Law was passed, and not the “Stablecoin Law”, may be  a missed opportunity.

The ‘model’ to be followed? The precedent of El Salvador’s actions

Secondly, the El Salvador Bitcoin Law could set a precedent to other countries on how to make Bitcoin legal tender. There have been reports that Panama and Paraguay will follow suit. Most importantly for the Eurozone, Malta, a country enthusiastic about cryptocurrency regulation, is reportedly keen to grant Bitcoin ‘legal tender’ status. 

Malta’s acceptance of Bitcoin as ‘legal tender’ could cause a constitutional crisis in the EU due to the status of the euro. It has been argued that there is no mechanism for a country to exit the Eurozone under any European Union treaty. Mario Draghi, the former president of the European Central Bank (‘ECB’), claimed in a 2012 speech that “the euro is irreversible”. Although Malta would not be exiting the euro per se, they would be challenging its authority and proposing a significant change to monetary policy.

There is a real possibility of conflict between the ECB and Member State (‘MS’) courts over Bitcoin-related monetary policy. Monetary policy is an issue that has dogged the European Court of Justice (‘ECJ’) and MS courts in recent years, as seen in the Gauweiler and Weiss judgments, which dealt with the legality of the ECB’s OMT and PSPP programmes respectively. The likelihood is that a dispute will arise, raising issues over sovereignty and who has competence to deal with this issue. The ECB’s position on crypto is clear. Frank Elderson, an ECB board member, recently tweeted that “Crypto-assets are volatile. They lack any intrinsic value and there is no reliable institution backing them”. Furthermore, the EU’s 5th Anti-Money Laundering Directive (‘AMLD5’), which was issued in 2018 and comes into force in 2022, explicitly requires crypto-currency traders to adhere to AML/CTF (Anti-Money Laundering and Counter-Terrorism Financing) rules. It has been argued that this will compromise Bitcoin’s privacy and Malta will, thus, be facing either (i) a loss of the utility of Bitcoin or (ii) EU sanctions as a result of their actions.

Conclusion 

So, is Bukele’s Bitcoin Law a gamechanger or a gambit? Tim Jacklich, senior analyst at Americas Market Intelligence, argues that “with El Salvador’s per capita GDP unlikely to return to pre-pandemic levels until 2024, Salvadorans should exercise caution regarding risky crypto bets.” Alongside that concern, the Bitcoin Law could possibly violate Arts. 23, 101 and 102 of the El Salvadorian Constitution so it is likely to face significant political and legal challenges. Despite this, the benefits of decentralised, non-trust-based currency systems to recipients of remittances should not be understated, and the author would welcome a Tether-based ‘legal tender’ in the future. El Salvador’s Bitcoin Law may be the wrong cryptocurrency at the wrong time but the move should be watched closely. Do not be surprised if other Latin American countries (or even Malta) follow suit.

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Max Shreeve-McGiffen is a graduate of the University of Oxford and University College London, with a keen interest in technology law and plans to undertake a PhD in the legal regulation of synthetic 'deepfake' content.He is also the Founder and Chief Editor of the UK Public Law Blog,

Published: 2021-08-02T08:00:00

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