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El Salvador moves into bitcoin

El Salvador, wracked with gang violence, has a reputation for being the deadliest place on the planet that isn’t an actual war zone.

Driving the news: It’s also newly hot in the crypto world, after President Nayib Bukele announced (and swiftly enacted) a law saying his country would accept bitcoin as legal tender.

Context: El Salvador hasn’t had its own currency since 2000, when it switched to the dollar. It therefore loses no sovereignty or seignorage by adopting a second external currency as legal tender.

  • The law makes any capital gains from investing in bitcoin tax-free, which Bukele hopes will attract some of the crypto industry to his country.

Between the lines: Bukele’s authoritarian and anti-democratic tendencies are probably stronger than his grasp of economic concepts like the distinction between stocks and flows.

How it works: The Salvadoran government intends to set up a trust at the Development Bank of El Salvador “to instantly convert bitcoin to U.S. dollars.”

  • The risk here is that El Salvador, either by accident or design, will become a commission-free laundromat for any criminals wanting to turn dirty bitcoin into clean dollars.
  • Bukele has frequently been accused of working closely with the MS13 gang in particular.

Be smart: Bukele has framed this move as helping facilitate remittance flows into the country. But bitcoin has not played an important role in remittances anywhere.

  • As cryptocurrency consultant Eloisa Marchesoni told Fortune, Bukele’s idea, given bitcoin volatility and gas fees, “does not make sense at all.”

Our thought bubble via Coindesk's Nikhilesh De: Most other countries are letting businesses make their own decisions around whether they want to handle bitcoin. Others prevent them from touching the cryptocurrency. El Salvador is bucking the trend by trying to force businesses to accept the cryptocurrency.

  • Few countries — even those without their own currency — are expected to follow suit.

The bottom line: El Salvador’s move does nothing to reassure observers who worry that bitcoin’s prime real-world use case is crime.

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