El Salvador legalizes Bitcoin | What it means for India | EXPLAINED
El Salvador, a small coastal country in Central America, has become the first in the world to make Bitcoin legal.
This decision of El Salvador changes has no significance for India.
Why no significance?
El Salvador has no monetary policy of its own and hence, no local currency to protect.
The country was officially ‘dollarized’ in 2001 and runs on the monetary policy of the US Federal Reserve.
Why did El Salvador legalize Bitcoin?
According to an official statement, Bitcoin will make it easier for Salvadorans living abroad to send payments home.
In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy.
El Salvador's economy relies heavily on remittances, or money sent home from abroad, which make up around 20% of the country's gross domestic product (GDP).
Did US Federal Reserve Policy push El Salvador for such a decision?
El Salvador is in part motivated by loose and expansionary Federal Reserve policy.
While banks in the US received liquidity with the stimulus, El Salvador did not but lost purchasing power instead.
The official bill proposal stated explicitly that “central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador… (and) in order to mitigate the negative impact of central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria,” i.e, Bitcoin.
Conclusion
Most of the world's central banks are looking into the possibility of creating their own digital currencies.
E.g. Bank of England & RBI.
