On June 8, 2021, El Salvador’s Legislative Assembly voted to establish Bitcoin as unrestricted legal tender, making El Salvador the first sovereign nation to formally adopt the cryptocurrency.
The Bitcoin law, which will come into effect 90 days from its publication in the Official Gazette, holds that the state is obligated to promote financial inclusion and well-being for its citizenry.
Among the benefits to the citizens of El Salvador are the ability to express prices in Bitcoin, transact on a day-to-day basis in Bitcoin, and pay taxes in Bitcoin .
The move by a sovereign nation to adopt Bitcoin as legal tender is seen as a validation of some of the digital currency’s key features: Bitcoin is globally transmissible, cryptographically secure, and tamper-resistant.
Some reiterated that Bitcoin has not proved to be a valid means of payment, and that the Legislative Assembly’s decision to pass the bill on a countrywide scale without pilot testing or technical analysis was reckless.
Thus, if bitcoin were classified as “money” under the UCC,” perfection of a security interest therein would be impossible unless the bitcoin involved were converted to a different classification under Article 9 of the UCC.
UCC 9-332 states that “a transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Establishing such collusion has proved to be a tough threshold for any secured party to meet.
The UCC’s permanent editorial board has been working on a new Article 12 to address digital assets , and will propose amendments to the definition of “money” in Article 1.
Some critics claim that El Salvador’s Bitcoin law will primarily benefit organized crime in Central America, aiding in sanctions evasion and money laundering efforts.
In particular, the definition of foreign currency that the IRS provides in Notice 2014-21 suggests that currency must be issued by a country, rather than merely accepted as legal tender there, in order to qualify as foreign currency for US tax purposes.
What about US-based multinationals with branches or franchises located in El Salvador? If the Bitcoin law requires all businesses to accept Bitcoin, does a US company now have to make room on its balance sheet for the digital currency? Not necessarily.
It has been reported that the World Bank rejected El Salvador’s request for technical assistance with implementing Bitcoin as legal tender due to Bitcoin’s “environmental and transparency shortcomings.” Concerns about the Bitcoin market’s transparency and potential susceptibility to manipulation are also preventing the Securities and Exchange Commission , although Canada and Brazil have already done so.
Meanwhile, El Salvador is ratcheting up its efforts to attract blockchain and digital asset entrepreneurs to drive innovation, develop the industry, increase employment opportunities, and contribute to the country’s GDP.
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