El Salvador: an analysis of the monetary integration law and the bitcoin law

ALONSO, SERGIO LUIS NÁÑEZ; FERNÁNDEZ, MIGUEL ÁNGEL ECHARTE; BAS, DAVID SANZ; RICO, CRISTINA PÉREZ

doi:10.1590/0101-31572024-3459

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Brazilian Journal of Political Economy

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Articles • Brazil. J. Polit. Econ. 44 (1) • Jan-Mar 2024 • https://doi.org/10.1590/0101-31572024-3459 copy

El Salvador: an analysis of the monetary integration law and the bitcoin law

El Salvador: uma análise da lei de integração monetária e da lei do bitcoin

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The objective of this article is to analyze the two most important monetary laws that have been implemented in El Salvador, namely the Monetary Integration Law (MIL) and the Bitcoin Law. The most important articles of both laws will be analyzed, as well as the consequences of dollarization, and the possible advantages and risks associated with the adoption of Bitcoin as legal tender. Although this measure may have some positive aspects by encouraging financial innovation and facilitating remittances, the macroeconomic risk is very high due to the volatility of this cryptocurrency. So far no positive results have been achieved as the acceptance has been very low and there has been a depreciation of the asset in recent months.

KEYWORDS:
Dollarization; volatility; currency stability; remittances; inflation; cryptocurrency

Date	Average purchase price: average $ / ₿ that day	Amount of bitcoin	Cost historic price * amount ($)	Current value current price * amount ($)	P/L value/cost comparison	% Win/loss
Sep 06, 2021	51769.06	200	10353812	6324264	-7006256	-67.67%
Sep 06, 2021	51769.06	200	10353812	6324264	-7006256	- 67.67%
Sep 07, 2021	52677.4	150	7901610	4743198	-5390943	-68.23%
Sep 20, 2021	47249.38	150	7087407	4743198	-4576740	- 64.58%
Oct 27, 2021	60345.17	420	25344971.4	13280954.4	-18315103.80	- 72.26%
Nov 26, 2021	58935.45	100	5893545	3162132	-4219767	- 71.6%
Dec 04, 2021	48670	150	7300500	4743198	-4789833	- 65.61%
Dec 22, 2021	48934.57	21	1027625.97	664047.72	-676132.59	- 65.8%
Jan 21, 2022	36585.37	410	15000000	12964741.2	-8137510.20	-54.25%
May 09, 2022	30744	500	15372000	15810660	-7003110	-45.56%
July 01, 2022	19 000.00	80	1520000	1339022.40	-180977.60	-11.91%

Average purchase price: average $ / ₿ that day	Amount of bitcoin	Cost historic price * amount ($)	Current value current price * amount ($)	P/L value/cost comparison	% Win/loss
$ 45.004.32	2381	$ 107.155 283.37	$ 39.852654.18	-$ 67.302.629.19	-62,81%

Advantages of bitcoin adoption	Risks of bitcoin adoption
Reduction of remittance fees, which may increase the amount of current transfers from the U.S. (Sparkes, 2022Sparkes, M. (2022). El Salvador revamps bitcoin system. New Scientist, 253(3373), 8. https://doi.org/10.1016/s0262-4079(22)00215-9 https://doi.org/10.1016/s0262-4079(22)00... ; Sorto Rivas, 2022Sorto Rivas, F. (2022). Situación económica en el marco de la adopción del Bitcoin como moneda de curso legal en El Salvador. AKADEMOS, 1(36-37), 7-17. https://doi.org/10.5377/akademos.v1i36-37.14944 https://doi.org/10.5377/akademos.v1i36-3... ; Mohammed et al., 2023Mohammed, M. A., De-Pablos-Heredero, C., & Montes Botella, J. L. (2023). Exploring the Factors Affecting Countries’ Adoption of Blockchain-Enabled Central Bank Digital Currencies. Future Internet, 15(10), 321. https://doi.org/10.3390/fi15100321 https://doi.org/10.3390/fi15100321... )	Increased macroeconomic risk. The approval of the Bitcoin Law may harm future negotiations with the IMF due to increased country risk (Fusades, 2021Fusades. (2021). Ley Bitcoin: una ley que genera incertidumbre para los salvadoreños. Fundación Salvadoreña para el Desarrollo Económico y Social.)
It can foster financial innovations by promoting the financial inclusion of a significant portion of the population that is unbanked but has a cell phone. (Vincent & Evans, 2019Vincent, O., & Evans, O. (2019). Can cryptocurrency, mobile phones, and internet herald sustainable financial sector development in emerging markets? Journal of Transnational Management, 24(3), 259-279. https://doi.org/10.1080/15475778.2019.1633170 https://doi.org/10.1080/15475778.2019.16... : Alonso et al., 2022Alonso, S. N., Fernández, M. A. E., Vázquez, J. J., & Szymla, W. (2022). CBDC y DEFI en el Caribe, Sudamérica y Centroamérica: análisis de la situación. In Digitalización de empresas y economía: tendencias actuales (pp. 282-306). Dykinson.)	Environmental risk. Mining of this asset generates high electricity consumption. (Jiang et al, 2021Jiang, S.; Li, Y.; Lu, Q.; Hong, Y.; Guan, D.; Xiong, Y.; Wang, S. (2021). Policy assessments for the carbon emission flows and sustainability of Bitcoin blockchain operation in China. Nature Communications, 12(1). https://doi.org/10.1038/s41467-021-22256-3 https://doi.org/10.1038/s41467-021-22256... ).
It can drive the adoption of bitcoin as a medium of exchange internationally. (Sparkes, 2022Sparkes, M. (2022). El Salvador revamps bitcoin system. New Scientist, 253(3373), 8. https://doi.org/10.1016/s0262-4079(22)00215-9 https://doi.org/10.1016/s0262-4079(22)00... )	High volatility of the digital asset, which generates commercial uncertainty and makes economic calculation difficult. Bitcoin is far from being a widely accepted medium of exchange. (De Oliveira Monteiro et al., 2019De Oliveira Monteiro, A. H., de Souza, A. D., Batista, B. G., & Zaparoli, M. (2019). Market prediction in criptocurrency. Proceedings of the XV Brazilian Symposium on Information Systems. http://dx.doi.org/10.1145/3330204.3330272 http://dx.doi.org/10.1145/3330204.333027... ; Sorto Rivas, 2022Sorto Rivas, F. (2022). Situación económica en el marco de la adopción del Bitcoin como moneda de curso legal en El Salvador. AKADEMOS, 1(36-37), 7-17. https://doi.org/10.5377/akademos.v1i36-37.14944 https://doi.org/10.5377/akademos.v1i36-3... )
	If there is a depreciation in the future economic agents who have saved in that asset will lose part of their wealth.
Attraction of investment for the mining of this digital asset. (Alvarez et al., 2022Alvarez, F., Argente, D., & Van Patten, D. (2022). Are cryptocurrencies currencies? Bitcoin as legal tender in El Salvador. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4094160 https://doi.org/10.2139/ssrn.4094160... )	Transaction costs are added when switching from dollars to bitcoin, and vice versa. In fact, this cost is currently higher than traditional remittance. (Fusades, 2021Fusades. (2021). Ley Bitcoin: una ley que genera incertidumbre para los salvadoreños. Fundación Salvadoreña para el Desarrollo Económico y Social.)
If the price of bitcoin increases in the future, economic agents who have saved in this digital asset will see their wealth increase. (Fantazzini & Calabrese, 2021Fantazzini, D., & Calabrese, R. (2021). Crypto exchanges and credit risk: Modeling and forecasting the probability of closure. Journal of Risk and Financial Management, 14(11), 516. https://doi.org/10.3390/jrfm14110516 https://doi.org/10.3390/jrfm14110516... ; Fantazzini, 2022Fantazzini, D. (2022). Crypto-Coins and credit risk: Modelling and forecasting their probability of death. Journal of Risk and Financial Management , 15(7), 304. https://doi.org/10.3390/jrfm15070304 https://doi.org/10.3390/jrfm15070304... )	May encourage money laundering activities. (Fusades, 2021Fusades. (2021). Ley Bitcoin: una ley que genera incertidumbre para los salvadoreños. Fundación Salvadoreña para el Desarrollo Económico y Social.)
Increase in state digital education initiatives for the general population. (Sparkes, 2022Sparkes, M. (2022). El Salvador revamps bitcoin system. New Scientist, 253(3373), 8. https://doi.org/10.1016/s0262-4079(22)00215-9 https://doi.org/10.1016/s0262-4079(22)00... )	Disagreement of the population with the use of bitcoin as legal tender. (Alvarez et al., 2022Alvarez, F., Argente, D., & Van Patten, D. (2022). Are cryptocurrencies currencies? Bitcoin as legal tender in El Salvador. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.4094160 https://doi.org/10.2139/ssrn.4094160... )

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[TFN1] Source: Own elaboration based on data (11/11/2022) from https://nayibtracker.com/.