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The Bitcoin Law: Counterfeit Free Choice in Currency

“Why should we not let people use freely what money they want to use? [They] ought to have the right to decide whether they want to buy or sell for francs, pounds, dollars, D-marks, or ounces of gold. I have no objection to governments issuing money, but I believe their claim to a monopoly, or their power to limit the kinds of money in which contracts may be concluded within their territory…to be wholly harmful.”
—F.A. Hayek, Choice in Currency: A Way to Stop Inflation, p. 17.

So, it has happened: a country—an honest to God, bona fide, country, complete with its own flag, coat of arms, seat at the U.N., army and air force—a small navy, even!—has adopted bitcoin—that’s right, bitcoin!—as its official currency. In one stroke, Nayib Bukele, El Salvador’s popular though controversial young President, has accomplished what many, myself among them, thought might never happen.

Any way you view it, it’s a huge step for the bitcoin network, and one some see as establishing a precedent other developing countries might follow. No wonder that, although it’s now been more than a week since the Bitcoin Law was passed, many Bitcoin devotees haven’t stopped celebrating.

And I’d be celebrating right along with them, were it not for some of the Bitcoin Law’s disturbing features.

Faster than Lightning

If El Salvador’s move came as a surprise to bitcoin skeptics like myself, what must it have seemed like to most Salvadorans, who probably learned of it only after its passage at midnight on June 8th?  That the new law was even in the works only became known on June 6th, and that revelation came, not from some official event in El Salvador, but from a videotape played at the Bitcoin 2021 conference in Florida in which (after a long, emotional intro by Zap CEO Jack Mallers), Bukele himself revealed what was up.

Just two days later, after a five-hour session that started just as most Salvadorans were tuning in to watch El Salvador beat Antigua and Barbuda in the World Cup qualifiers, Congress passed the Bitcoin Law. The outcome itself was no surprise: of the 64 out of 84 deputies who voted for the measure, 61 represented either the New Ideas party, which Bukele founded, or the Grand Alliance for National Unity (GANA), through which he became president just over a year ago.

But even allowing for Bukele’s rubber-stamp Congress, the blistering speed with which the measure was rushed through was unseemly. As Andres Guadamuz, a cyberlaw expert at the University of Sussex, says in his blog, Technollama,

The law was passed with practically no discussion, oversight, or scrutiny… [It] was rushed through the financial committee with a laughably short discussion paper consisting of three pages that contain no discussion, only a listing of a few advantages of the currency. For such a major economic change, there is absolutely no evidence collected on how this will affect the country.

According to El Faro, 

the Finance Committee left no time to hear from the implementing agencies, banks, economists, or anyone else. Arena Deputy Rodrigo Ávila said his party wasn’t opposed to the discussion of the bill, but asked to hear expert opinions and for a slower process. Nuevas Ideas flatly said no. “I took the time to sift through the list of ‘experts’ that they’ve invited to give their opinion, and they’ve always been the same. So, why would we call them here if they know nothing about this topic?” said deputy William Soriano.

This hasty procedure resembles that by which El Salvador’s Monetary Integration Act, providing for its official dollarization, was passed. That measure was also kept secret until then-President Francisco Flores announced it in mid-November 2000. But on that occasion Congress took eight days to consider the bill before passing the law after another late-night, party-line vote.

The Good, the (Not So) Bad…

Th the Bitcoin Law’s sketchy provisions suggest that the time spent drafting it can’t have been all that much greater than the time Congress spent discussing it makes the lack of discussion all the more disturbing. The law, which will take effect on September 6th (a Monday), consists of just 10 brief principal articles and another six “Final and Transitional Provisions.” Its more important, substantive provisions are:

Article 2. The exchange rate between bitcoin and the United States dollar, subsequently USD, will be freely established by the market.

Article 3. Prices may be expressed in bitcoin.

Article 4. Tax contributions can be paid in bitcoin.

Article 5. Exchanges in bitcoin will not be subject to capital gains tax, just like any legal tender.

Article 6. For accounting purposes, the USD will be used as the reference currency.

Article 7. Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.

Article 8. Without prejudice to the actions of the private sector, the State shall provide alternatives that allow the user to carry out transactions in bitcoin and have automatic and instant convertibility from bitcoin to USD if they wish. Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

Article 9. The limitations and operations of the alternatives of automatic and instantaneous conversion from bitcoin to USD provided by the State will be specified in the Regulations issued for this purpose.

Article 10. The Executive Branch will create the necessary institutional structure to apply this law.

Article 12. Those who, by evident and notorious fact, do not have access to the technologies that allow them to carry out transactions in bitcoin are excluded from the obligation expressed in Art. 7 of this law. The State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

Article 13. All obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin.

Article 14. Before the entry into force of this law, the State will guarantee, through the creation of a trust at the Banco de Desarrollo de El Salvador (BANDESAL), the automatic and instantaneous convertibility of bitcoin to USD necessary for the alternatives provided by the State mentioned in Art. 8.

With the exceptions of Articles 4, 7, and 13, these provisions merely put “bitcoin” (generally understood to mean BTC, although the law is not yet specific on this point) on a level playing field with the U.S. dollar, which has been El Salvador’s official currency since 2001. As such these provisions constitute an unalloyed victory for the principle of free choice in currency, and as such warrant celebrating. Article 4, making bitcoin the medium in which taxes are to be paid, is hardly more objectionable, as it merely indicates the medium with which El Salvador’s government itself wishes to be paid.

Article 13 goes a step further, by making it legal for someone to settle an outstanding debt contracted in USD with bitcoin instead. This violates the principle of free choice in currency. But at least it does no more than a similar provision in El Salvador’s 2001 legislation, by which the U.S. dollar itself was made legal tender for the purpose of settling outstanding debts.

Nor are such legal tender provisions like Article 13 uncommon elsewhere. Every Federal Reserve note, for example, declares itself “legal tender for all debts public and private” (my emphasis). As F.A. Hayek explains in Denationalisation of Money, such legal tender laws are usually innocuous, if otiose. “In its strictly legal meaning,” Hayek says, it usually refers to nothing more than

the means of discharging a debt contracted in terms of the money issued by government or due under an order of a court. In so far as government possesses the monopoly of issuing money and uses it to establish one kind of money, it must probably also have power to say by what kind of objects debts expressed in its currency can be discharged. But that means neither that all money need be legal tender, nor even that all objects given by the law the attribute of legal tender need to be money.

…and the Ugly

Article 7 is a horse of a different color. Unlike most legal tender legislation, including El Salvador’s 2001 law, it compels sellers of ordinary goods and services to accept bitcoin, not merely in payment of unpaid debts, but in “spot” payments. As Bukele put it in a Q&A session concerning the new law, “If there is a lady selling fruit on the market, she is obliged to be paid in bitcoin.”

Despite what many Bitcoiners seem to think, few countries have such laws. The United States, for example, doesn’t.  As J.P. Koning explains, in a post drawing on Dror Goldberg’s excellent research on the subject,

If you are engaged in an exchange with someone that doesn’t involve the settling of debts, then legal tender laws don’t apply. For example, say you walk into a corner store and offer to pay for cigarettes using legal tender platinum coins. The store owner can legally refuse to accept the coins. After all, the two of you are not settling debts—you’re engaging in a spot transaction. The owner is on the right side of the law in requiring payment in, say, peanuts. Either pay him in peanuts or walk out of the store without your smokes.

The same goes for Federal Reserve notes. Although they’re legal tender for the settlement of dollar debts, sellers routinely operate on a “credit only” basis, with many more doing so lately owing to concerns about COVID-19. Merchants in the U.S. and most other countries are also perfectly free to try and operate on a bitcoin-only basis, as this Prague espresso bar has been doing for a while now.

This isn’t to say that Article 7 of El Salvador’s Bitcoin Law is unique. In fact there have been laws like it in the past. But as David Birch reminds us in a recent Forbes essay, they’ve usually been resorted to by desperate governments trying to saddle their citizens with doubtful fiat paper—think Kublai Khan, Continental Currency, and assignats! Goldberg has another excellent article all about such laws, and what he writes about them isn’t pretty. Such laws, They are, he says,

considerably more remarkable than the innocuous legal tender laws that every modern country has. Legal tender laws only settle civil disputes about discharging pre-existing debts and taxes. They do not force sellers to accept the spot, whereas the rule concerned here does. Legal tender laws typically threaten creditors only with dismissal of their lawsuits if they insist on rejecting tender of the [legal tender] money. The rule concerned here has threatened all sellers with anything from a fine to the death penalty. This is a rule that strikes at the very heart of the freedom of exchange and contract. As its practical implication has typically been to force producers to part with all their produce for paper, it can also be a severe violation of property rights. It is a rule that penalises passive behaviour. It is, or should be, a controversial rule, unlike a rule prohibiting counterfeiting of money.

In fact, “forced money” rules (as Goldberg calls them, to distinguish them from ordinary legal tender laws) are controversial. Hence their rarity today. But it doesn’t follow that everyone disapproves of them. Instead, some legislators like them:

Accepting the state’s money against ones will is a symbolic obedience to the state. Politically authoritarian regimes are therefore likely to adopt such a rule for this reason alone, even if nobody has ever rejected that money or is expected to reject it. Accepting the state’s money is also consistent with, and conducive to, economic management by the state. Some economically authoritarian regimes are therefore also likely to adopt such a rule for this reason alone.

If this isn’t enough to make fans of El Salvador’s Bitcoin Law regret that law’s 7th Article, I dare say that they must either love liberty too little, or love bitcoin too much!

Sticks and Carrots

El Salvador’s bitcoin gambit didn’t start out that way. Instead, it began with an entirely voluntary experiment in El Zonte, now famous as “Bitcoin Beach.” Instead of being forced to accept bitcoin, El Zonte’s merchants were encouraged to do so through the granting, by an anonymous U.S. bitcoin whale, of the BTC equivalent of about $45 each to 500 El Zonte families. By offering to accept bitcoin using their mobile phones, El Zonte’s merchants could attract more business, from those families but also from bitcoin-equipped tourists lacking credit cards or cash. In a once dirt-poor fishing village with only 3000 residents, those were some carrots!

Even so, bitcoin didn’t entirely catch on. Though it’s been almost four years since the Bitcoin Beach project began, just days ago Nelson Renteria reported that many of El Zonte’s small merchants and vendors, like Zulma Rivas, who began accepting bitcoin from tourists as part of the Bitcoin Beach experiment, has since stopped doing so “because like many in the town, her battered smartphone struggles with the payments app,” and because “she often runs out of data on her prepaid contract.” Many of Rivas’s fellow vendors prefer dollars for the same reason, and also because, even when their phones work and they have data to spare, El Zonte’s patchy internet makes completing a bitcoin sale a hit-or-miss proposition.

What has barely sufficed to win El Zonte over to bitcoin, and then only imperfectly, obviously wouldn’t do for El Salvador as a whole: apparently El Zonte’s benefactor wasn’t prepared to grease the bitcoin-adoption skids of an entire nation! So, out went that rich benefactor’s carrots, and in came Article 7: Bukele’s big stick.

As I’ve observed several times now on Twitter, and in various interviews (like this one with Naomi Brockwell, aka “The Bitcoin Girl”), it’s more than a little ironic that a movement that began as a libertarian protest against fiat money should now embrace the very tactics past governments relied upon to saddle innocent citizens with it.

Real and Pseudo Choice in Currency

Some insist that El Salvador’s Bitcoin Law isn’t coercive, because it exempts those not yet equipped to accept bitcoin from having to do so, and because it will allow anyone paid in bitcoin to instantly convert them into U.S. dollars. The law’s 12th Article provides for exceptions, while Articles 8, 9, 10, and 14 are supposed to guarantee convertibility of BTC into USD.

But a law doesn’t cease to be coercive because not everyone is subject to it. Moreover, it’s clear that the government eventually intends to have it apply to all Salvadorans, by “promot[ing] the necessary training and mechanisms so that the population can access bitcoin transactions” (Articles 8 and 10) and by “creat[ing] the necessary institutional structure” (Article 9). Eventually, if all goes according to plan, no Salvadoran business will be able to refuse payment in bitcoin.

And plenty of Salvadorans are likely to be forced to use bitcoin against their will as soon as the law goes into effect.  Although El Salvador’s internet coverage remains spotty, almost all Salvadoran’s, and certainly most vendors and other merchants, have cellphones, and plenty will be able to use them to accept bitcoin. Yet according to a recent survey by El Salvador’s Chamber of Commerce, in which over 1600 persons have taken part so far, 92% said that they didn’t agree with the rule making acceptance of bitcoin mandatory, and 93.2% said that they didn’t want to have their salaries paid in it. Perhaps more surprisingly, given bitcoin’s supposed advantages as a means for remitting money from abroad, 82.5% said that they weren’t interested in receiving their remittances that way. Nor is allowing bitcoin recipients to choose between holding BTC or converting them into USD equivalent to not compelling them to accept BTC in the first place. At best it guarantees that those compelled to accept bitcoin needn’t suffer any harm by doing so.

When a Dollar isn’t a Dollar

In fact it’s far from obvious that the Bitcoin Law will do no harm, because as yet no one knows just what arrangements the government has in mind in declaring that it will provide for “automatic and instant convertibility from bitcoin to USD.”  However, as Bitcoin Magazine reported recently, the fact that Jack Mallers, who (besides introducing Bukele’s announcement in Miami) founded the Lightning Payments platform Strike, will be helping El Salvador’s government to establish the necessary infrastructure, suggests to many that that infrastructure will itself rely on the Strike platform and Lightning Network, versions of which are already used to make remittances to El Salvador and to handle BTC payments at  Bitcoin Beach.

The nuts-and-bolts of Strike Global are not for the feint-of-heart; and good luck trying to figure it out from the enigmatic webpage devoted to it by its developer, ZAP Solutions. According to Cointelegraph‘s Andrei Shevchenko,

Strike Global is not too unlike traditional fintech apps, but it uses the Lightning Network for settlement. This means that payments can be essentially instantaneous and at a fraction of the cost of traditional payment rails.

Strike Global has two types of transfers, depending on the recipient’s location. For countries with a developed banking system, Strike allows users to send payments without going through Bitcoin (BTC) themselves. Strike will automatically withdraw money from the user’s bank account, exchange it into BTC, and then exchange it back into the recipient’s fiat currency and banking system.

The system largely piggybacks off the existing Bitcoin exchange infrastructure, which already allows for much cheaper, simpler remittances if users are willing to go through them manually. Since national exchanges are usually integrated with the local banking system, using Bitcoin or other cryptocurrencies allows much cheaper conversion rates compared with cross-border banking.

Now comes the interesting part:

For countries without developed banking systems, Strike allows users to hold their money either in Bitcoin or Tether (USDT). The cryptocurrency can then be exchanged into local cash or fiat through ad-hoc solutions like Bitcoin ATMs, LocalBitcoins and others. Strike simplifies many of the exchange processes in the back end to make the experience similar to other fintech apps.

El Salvador may not qualify as a country without a developed banking system. But as Jack Mallers himself remarked in introducing Bukele’s video in Miami, it certainly qualifies as one with large numbers of unbanked citizens: “Over 70% of the active population of El Salvador,” he said, “doesn’t have a bank account. They’re not in the financial system. [The government] asked me to help… put together a Bitcoin plan to help these people.”

But as I’ve noted above, while many Salvadorans lack bank accounts, almost all of them have cellphones. And it appears that, so far as these Salvadorans are concerned, instead of allowing for “automatic and instantaneous conversion from bitcoin to USD,” El Salvador’s bitcoin-payments infrastructure will allow for the instantaneous conversion of bitcoin into tethers, that is, into what Jack Mallers calls “synthetic digital dollars.” Tethers aren’t equivalent to genuine fiat dollars both because they’re largely backed not by fiat dollars themselves but by “cash equivalents,” including corporate bonds and because their value fluctuates in terms of them, if only slightly.

Cashing Out

But the riskiness of Tether is the least of it. The more serious burden this scheme imposes on Salvadoran’s, and particularly on the unbanked Salvadoran’s it is mainly supposed to help, consists of the costs they must incur to convert their tethers into actual fiat dollars, which are presently El Salvador’s most popular medium of exchange, and are likely to remain so for some time owing to the “evident and notorious fact” that many Salvadorans “do not have access to the technologies that allow them to carry out transactions in bitcoin.”

At present, the only way to convert USDT to fiat is to convert the USDT to Bitcoin, and then use a Bitcoin ATM or the human equivalent, a Bitcoin “teller,” to buy fiat dollars. In short, “instantaneous conversion” of BTC into “synthetic digital dollars” is of no use at all to a seller who’d rather have fiat dollars, because her workers or suppliers aren’t themselves equipped to be paid in bitcoin.

And converting bitcoin to fiat can be a costly hassle. Tellers naturally charge a commission—assuming they don’t rip you off. But using a Bitcoin ATM is no better, in part because so far there are only two of them, both of which are at Bitcoin beach.

And those ATMs also charge a hefty commission—around 8%—to convert dollars to bitcoin or vice versa. The AP’s Marcos Aleman recently instanced the case of Edgar Magaña, who came to El Zonte “from San Salvador to convert $50 to bitcoin. He inserted the dollars into the machine and was surprised to see only $47 in bitcoin fractions credited to his account on his phone. “They took three dollars commission,” Magaña said, adding that he had understood there was no commission. “This is like in the banks.” Any merchant seeking to convert BTC to dollars must bear a similar burden.

The alternative, of course, is for merchants to become bitcoin HODLers. According to explica.co, that’s what El Zonte cafe owner Rosalina Franco, who first began accepting bitcoin at the end of 2019, ended up doing. Her “strategy… was to ‘be patient’ and wait for BTC prices to rise before exchanging his tokens for dollars at a local Bitcoin ATM.” That’s one way to make up for costly ATM commissions. But if bitcoin’s price falls instead of increasing, it’s a way to end up losing even more money. Nevertheless, Franco is willing to take the risk, because “’foreigners who come to surf at El Zonte and some locals’ find it ‘easier’ to pay for local specialties such as pupusas (a popular grilled cake) using BTC.”

And that’s just dandy. But how dandy will it be when thousands of Salvadoran merchants have no choice but to take similar risks, or bear high ATM costs, in less than 80 days from now?

The Casa de Cambio: Another Black Box

What about the new law’s Article 14, providing that “the State will guarantee, through the creation of a trust fund at the Banco de Desarrollo de El Salvador (BANDESAL), the automatic and instantaneous convertibility of bitcoin to USD necessary for the alternatives provided by the State mentioned in Art. 8”?  According to El Presidente himself,

if there’s an ice cream parlor, and the owner of the ice cream parlor, he doesn’t really want to take the risk. I mean, he has to accept bitcoin, because it’s a mandated currency, but he doesn’t want to take the risk of the convertibility. He might win money, he might lose. So he wants dollars deposited in his banking account. So when he sells the ice cream, he can ask the government to exchange his bitcoin to dollars. Of course, he can do that in the markets also, but the government would have a fund to do it immediately. So it’s not that volatile because the government is going to take the risk of the minutes or half an hour that it’s going to take for him to do his transaction.

So we’re going to put up a trust fund to do that, and we’re willing to risk some money, that we might earn some or we might lose some, but that’s going to be done to help people with the risk. And that’s a separate law that’s going to go to be approved in the assembly later. … At the end we’re going to hold at least 150 million dollars equivalent of bitcoin, but that hasn’t been bought yet, because it’s going to be bought in the small transactions of 0.0001 bitcoins, so at the end we’re going to hold 150 million dollars equivalent in bitcoin. But right now, we’re not holding any bitcoin.

Some Bitcoin Law champions expect this arrangement to dispense with any possible harm the Bitcoin Law might otherwise do to innocent Salvadorans. But I wouldn’t bet on it. Why not? For one thing, it’s not clear that Bandesal’s exchange bureau or “Casa de Cambio” will be paying out paper dollars. Instead, a merchant who takes advantage of it will have digital dollars “deposited in his banking account,” assuming he has such an account. If not—if he’s one of those unbanked Salvadorans who has to accept bitcoin because he’s equipped to do so—he may have to settle for Tether, or for what he can get from a Bitcoin ATM.

And Article 9 warns even merchants with bank accounts not to bank on the Casa de Cambio until they’ve seen “The limitations and operations of the alternatives of automatic and instantaneous conversion from bitcoin to USD provided by the State,” which are to be “specified in the Regulations issued for this purpose.”

“A Currency Board, Sort of”

Limitations? What need is there for limitations? One reason is that the trust fund might be exhausted otherwise. The set-up Bukele has proposed has Bandesal’s exchange bureau or “Casa de Cambio” promising unlimited bitcoin conversion at dollar equivalents that leave original bitcoin recipients just where they’d have been had to been paid in real dollars instead. As Ed Salazar has explained in a Twitter thread, this arrangement resembles “a sort-of Currency Board against a volatile asset,” and as such “is a dangerous move.”

An orthodox currency board, like Hong Kong’s, takes in USD and issues an equivalent sum of domestic currency, where the domestic currency has a fixed USD exchange rate—in this case, about $7.8 (HK) per USD.  Hong Kong dollars are thus always fully backed by USD, and the government assumes no risk by offering to convert them on demand back into USD, without limit. In contrast, the proposed trust fund will be exposed to losses whenever the value of bitcoin offered to it declines between the time merchants themselves receive it and its conversion by the Case de Cambio into USD. Such losses could eventually exhaust the fund’s initial $150 million, which can be likened to its starting capital.

To consider a much-oversimplified case, suppose that, when the fund is first established, 1BTC is worth $50,000, and that the initial trust fund is accordingly invested in 300 BTC. Suppose that fears of a bitcoin price bust cause it to quickly receive another 10,000 BTC, from transactions worth $500 million when initially undertaken, but worth only $450 million by the time the exchange bureau sells them.  After making good on its commitment, it finds its trust fund reduced to just (3000 x $40,000) – ($50,000,000) = $70 million.  A second, similar event would then suffice to wipe out the fund altogether.

Of course the Casa de Cambio might not suffer such a streak of bad luck. Instead, if bitcoin’s price continues along its recent roller-coaster, its trust fund might gradually trickle down to nothing. Of course, the fund could also grow, as President Bukele undoubtedly hopes it will. But there’s no avoiding the obvious fact that the Casa de Cambio can only shield El Salvador’s bitcoin-receiving merchants from volatility risk by having El Salvador’s government—that is, its taxpaying citizens at large—bear it. TANSTAAFL.

And whether it comes about dramatically or in baby steps, the trust fund’s exhaustion, should it occur, will mean either that the government must replenish it from its limited USD reserves, or that it must secure an emergency loan from the CABIE or the IMF, or that it must suspend Trust fund conversions. Whatever happens, Salazar says, the fact remains that the setup “is so incredibly risky it beggars belief.”

A FATF Worse Than Death

Nor is that all. For even if El Salvador had the means to keep its “Casa de Cambio” in the black, despite meeting unlimited demands to convert bitcoin into dollars, it’s unlikely to be able to meet those demands without finding itself in a different kind of trouble, namely, with FATF, the Financial Action Task Force, which bills itself as the world’s “money laundering and terrorist financing watchdog” tasked with “monitor[ing] countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply.”

So far, El Salvador meets FATF’s requirements. But it’s far from clear how it can continue to do so while sticking to Bukele’s commitment to convert merchants’ bitcoin receipts into dollars. According to David Gerard, “It’s simply infeasible to run Know-Your-Customer checks on bitcoin transactions to accepted international FATF standards, and also have bitcoin treated like cash.” If Gerard and other authorities who have expressed similar concerns are right, El Salvador could become a haven, not just for honest bitcoin investors, but for money launderers; and instead of just meeting merchants’ legitimate requests to convert modest amounts of bitcoin into dollars, Bandesal’s Casa de Cambio could find itself laundering “large bags of dirty bitcoins.”

But it’s perhaps more likely still that, to avoid getting red-flagged by FATF,[1] and risk being sanctioned by it and other international organizations, El Salvador will have to place strict limits on its official bitcoin-dollar conversions, thereby backing away to some extent from its promise to guarantee the automatic and instant convertibility of bitcoin to USD at no cost, and with no risk of loss, to El Salvador’s legitimate businesses.

Doing it Right

Some Bitcoin Law apologists have challenged me to suggest legislation El Salvador might have adopted that would allow bitcoin to compete there on a level playing field with the U.S. dollar without compelling anyone to use it. In fact, that’s easy: one only has to take the present law and delete both Article 7 and those other articles that serve no purpose without it. The resulting articles (once again omitting those that are relatively unimportant, and allowing that the details could use more filling in) reads as follows:

Article 2. The exchange rate between bitcoin and the United States dollar, subsequently USD, will be freely established by the market.

Article 3. Prices may be expressed in bitcoin.

Article 4. Tax contributions can be paid in bitcoin.

Article 5. Exchanges in bitcoin will not be subject to capital gains tax, just like any legal tender.

Article 6. For accounting purposes, the USD will be used as the reference currency.

Article 8. Furthermore, the State will promote the necessary training and mechanisms so that the population can access bitcoin transactions.

Article 10. The Executive Branch will create the necessary institutional structure to apply this law.

Article 13. All obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin.

These nine provisions would suffice to give equal legal treatment to bitcoin and USD payments, while allowing either (but nothing else) as a legally sufficient, though not necessary, means for settling outstanding debts. They also go somewhat further, by having the government do its part to make it possible for all its citizens to accept payments in bitcoin, though without forcing any to do so.

Would such a law have succeeded in turning bitcoin into a nation’s money overnight? I very much doubt it. But it would have set the stage for a grand experiment in which a nation’s citizens might spontaneously adopt bitcoin as their preferred means of payment, without incurring any artificial penalties by doing so, and also without being compelled to. That is an experiment I’d like to see conducted in every nation on the planet. Alas, unless the Bitcoin Law is amended, if any ever tries it, it won’t be El Salvador.

______________________

[1] Among the many “red flags” FATF regards as signs of possible money laundering are several that would appear to make reliance upon El Salvador’s proposed Casa de Cambio a tempting alternative to people in that line of work. These include exchanging cryptocurrency for fiat currency at a loss, as when the value of cryptocurrency is fluctuating, or regardless of abnormally high commission fees as compared to industry standards, and using cryptocurrency ATMs or kiosks to do the same despite their high transaction fees.

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