El Salvador becomes the first country to use bitcoin as a legal tender

El Salvador on Tuesday became the first country in the world to accept bitcoin as legal tender, despite widespread  skepticism and international warnings of risks for consumers.

President Nayib Bukele's government claims the move will give many Salvadorans access to bank services for the first time and save some $400 million in fees on remittances sent home from abroad every year.

"Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador. #Bitcoin did this," Bukele said on Twitter Monday.

He set the ball rolling on Monday evening by announcing El Salvador had bought its first 400 bitcoins, in two tranches of 200, and promised more were coming.

The 400 bitcoins were trading at around $21 million, according to the cryptocurrency exchange app Gemini.

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Recent opinion polls showed a majority of El Salvador's 6.5 million people reject the idea and will continue using the US dollar, the country's legal currency for the last 20 years.

In June, El Salvador's parliament approved a law to allow the crypto money to be accepted as tender for all goods and services in the small Central American nation, along with the US dollar.

The bill, an initiative of Bukele, was approved within 24 hours of being presented to Congress — where the president's allies have held a majority since March.

Experts and regulators have highlighted concerns about the cryptocurrency's notorious volatility and the lack of any protections for its users.

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A risky bet

The government is installing more than 200 bitcoin teller machines, some guarded by soldiers to prevent possible arson by opponents.

And Bukele has promised $30 for each citizen who adopts the currency.

Oscar Cabrera, an economist at the University of El Salvador, said the currency's high volatility will have a "negative impact" on consumers, affecting the price of goods and services.

The currency fell beneath $30,000 in June, less than half its all-time high of more than $64,000 just two months earlier.

For its part, the Salvadoran Foundation for Economic and Social Development (FUSADE) said it was "unconstitutional" to make it compulsory for merchants to accept bitcoin as a form of payment.

Remittances account for more than a fifth of GDP in the dollarised economy, mainly sent in dollars via agencies such as Western Union by an estimated 1.5 million expats.

According to World Bank data, El Salvador received more than $5.9 billion in 2020 from nationals living abroad, mainly in the United States.

And the country is relying on this money to boost a struggling economy that contracted 7.9 percent in 2020 due in large part to the coronavirus pandemic.

Economists and international bodies such as the World Bank, International Monetary Fund and Inter-American Development Bank have expressed concerns about El Salvador's bitcoin adoption.

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But not everyone is against it, and according to Bukele in late June, some 50,000 Salvadorans were using bitcoin.