El Salvador made Bitcoin legal tender. Should Costa Rica follow?

El Salvador promises investment and economic development.

El Salvador this week became the world’s first country to adopt Bitcoin as legal tender.

“It will bring financial inclusion, investment, tourism, innovation and economic development for our country,” said President Nayib Bukele in a tweet.

Bukele says Bitcoin — a decentralized, digital currency — will make it easier for Salvadorans living abroad to send remittances home.1 In 2020, remittances to El Salvador totaled $5.9 billion, and millions of dollars were lost to intermediaries in those transactions (e.g. Western Union).

Under the new law, taxes in El Salvador will be payable via Bitcoin, and certain other financial entities will have to accept the cryptocurrency as payment.

El Salvador presently uses the U.S. dollar as its official currency, and it will remain legal tender alongside Bitcoin. However, as Bloomberg notes, adopting Bitcoin will give El Salvador more independence from the U.S. government and the U.S. Federal Reserve.

Will Costa Rica follow?

First things first: I am not an economist, and this is not financial advice to you or the Costa Rican government. (Thanks for subscribing to my Substack, President Alvarado!)

Aside from El Salvador, no other country has come close to turning Bitcoin into legal tender. Many international observers are skeptical, though others say the plan “isn’t as crazy as you think.”

In Costa Rica, employers can compensate workers with cryptocurrency. But that’s a risky proposition, since fluctuations in value can drastically impact how much is owed to the socialized healthcare system.

As El Salvador takes a bold step with Bitcoin, there are some considerations that might give Costa Rica pause about adopting the cryptocurrency in the near future:

The environmental impact

Cryptocurrency mining involves power-hungry computers that require a lot of energy. Bitcoin has been criticized for its environmental impacts — especially in countries where the electric grid is powered by fossil fuels.

Adopting Bitcoin might be perceived as incongruous with Costa Rica’s eco-friendly image which drives foreign tourism, the country’s biggest economic sector.

That said, Costa Rica’s electric grid is almost 100% renewable, suggesting Bitcoin mining could theoretically occur here without a significant negative environmental effect.

The IMF deal

Costa Rica and the International Monetary Fund (IMF) have agreed to a $1.75 billion loan that will be distributed over three years.

The Costa Rican government says the IMF loan is necessary to keep the country from plunging into a financial crisis. However, in order to receive the recurring payments, Costa Rica must adhere to the financial reforms to which it has committed.

El Salvador has also sought an IMF deal, and Reuters says the Bitcoin law “could further complicate” negotiations.

It’s unlikely Costa Rica’s government would take a risk with Bitcoin if it might threaten the IMF lifeline.

Fewer remittances

The decentralized Bitcoin currency may help with remittances to El Salvador, but those international transactions are of less importance to Costa Rica.

Received remittances in Costa Rica represent 0.9% of GDP. That’s a much smaller incentive to pursue Bitcoin when compared to the 20% of GDP they represent in El Salvador (and 13.5% in Nicaragua, and 13.9% in Guatemala).

The tax implications

Bitcoin is not anonymous2, but the currency provides an avenue through which large amounts of money can be moved without government oversight.

“Cryptocurrencies are overall a very easy way to avoid taxation and a very easy way to simply avoid the authorities because it’s a completely decentralized system, you can do money laundering, you can do tax avoidance and so on,” portfolio manager Carlos de Sousa told Al Jazeera.

El Salvador, for its part, says converting Bitcoin into dollars won’t be subject to capital-gains tax.

In Costa Rica, cryptocurrencies likely won’t be named legal tender until they can be taxed properly. After all, reducing tax evasion (and raising taxes in general) has been the country’s responses to its growing deficit.

Exciting times ahead

This week’s news out of El Salvador is no doubt exciting.

Maybe adopting Bitcoin will in fact create an economic boon for a country that desperately needs it. On the other hand, the cryptocurrency’s volatility — its value spikes and plunges in relation to the dollar — does make it an economic risk.

Today, a lot remains unclear about how exactly El Salvador will implement Bitcoin as a daily currency. They will, after all, be the trailblazers.

But for El Salvador, that may be a risk worth taking.

A cryptocurrency as legal tender is a unique experiment that economists across the world will surely watch closely.

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1

When migrants send home part of their earnings in the form of either cash or goods to support their families, these transfers are known as “remittances.”

2

“They are not as hard to track as cybercriminals think,” The New York Times reported this week.