When El Salvador withdrew its national colón currency in 2001, the US dollar became its legal tender. That was until 7 September this year, when the Central American country formally adopted Bitcoin to run alongside the dollar. It is a move that is now giving accountants a challenge as they are grappling its implications.
While the dollar will remain the most important currency in El Salvador, remaining the reference currency for accounting purposes, with greenback banknotes and coins still circulating, the Bitcoin Law that established the cryptocurrency in El Salvador will be both a challenge and opportunity for businesses.
One issue is that the exchange rate between the country’s two official currencies will float, creating accounting and possible cashflow difficulties. And businesses may have to accept the cryptocurrency, even if they would rather not.
The law says prices may be expressed in Bitcoin and insists that goods and service providers with the technical capacity must accept payments in the cryptocurrency. Moreover, all dollar invoices and bills issued in El Salvador before 7 September may be settled in bitcoin.
Tax contributions can be paid in Bitcoin, which could help taxpayers if the currency strengthens against the dollar, but not if it weakens. And, in contrast to US tax law, exchanges in Bitcoin made in El Salvador will not be subject to capital gains tax, ‘just like any legal tender’, states the law.
Many Salvadorans believe Bitcoin is widely used by criminals to launder money and for tax evasion
‘This is a twofold strategy to try and solve two issues in El Salvador: the growing dependency on the dollar, and the reduction of the costs of Salvadoran remittances from Salvadorians living in the US to their families,’ explains Otto Mora, EY senior manager of blockchain tech in Central America.
The government has tried to help the 6.4 million Salvadorans use Bitcoin through the state-sponsored digital wallet, Chivo (which means ‘cool’ in El Salvador Spanish).
However, there have been teething troubles. The morning that the app was launched, it was suspended by the government of Salvadoran president Nayib Bukele to increase server capacity. He claimed three weeks later, however, that 2.1 million Salvadorans were using the app, spending and receiving Bitcoin.
Adoption has been uneven so far, with ignorance over Bitcoin operations undermining its use, says Mora. He adds that many Salvadorans believe Bitcoin is widely used by criminals to launder money and for tax evasion.
To boost the adoption of Bitcoin, each new Chivo user receives US$30 worth of the cryptocurrency. But because of such incentives, identity theft has also surged, adds Mora.
Benefiting the unbanked?
A key benefit, president Bukele has claimed, is that Chivo can receive remittances from Salvadorans overseas. Around 23% of the country’s GDP is remitted by Salvadoran expats, totalling US$5.9bn in 2020, so reducing payment and wire fees for recipients is important.
The other benefit is giving financial services to the 70% of Salvadorans who remain unbanked, the president has argued.
Mora is sceptical. ‘Bukele wants to claim the cost of remittances through Chivo is zero, which is nothing more than a political strategy,’ he says. ‘Salvadorans in the US do not have access to the banking system, so how are they going to inject their dollars into a digital system to buy Bitcoin to later send to their families? There is an implicit cost and a lack of access.’
Asset, not currency
In addition, Mora believes that Salvadorans who are using Bitcoin will utilise it as an asset, not as a currency, despite El Salvador’s tax rules saying it is money, not a purchase. People or companies ‘will not use it mainly to pay everyday transactions, but to invest a small part of their savings in Bitcoin,’ he predicts.
That could create headaches for companies with a presence in El Salvador and the US, Mora says, given the contrast in their tax laws over currency/asset definitions. ‘This is still a conundrum and there is no clear pathway for surfing such volatility,’ he says.
One benefit is giving financial services to the 70% of Salvadorans who remain unbanked
PwC crypto leader Henri Arslanian thinks there are real benefits for El Salvador, besides lowering remittance fees, however. ‘In the Covid-19 era, there are record levels of quantitative easing, which economists warn may fuel inflation and currency devaluation. Bitcoin adoption enables El Salvador to be more independent from American monetary policy,’ he says, which still supports low interest rates. Bitcoin will not have ‘a big impact’ on companies operating in El Salvador today, but he sees a ‘boom’ of investments into crypto companies based in the country.
As for day-to-day usage, Arslanian says that while Bitcoin is ‘pretty user-friendly’ to receive and ‘easy’ to convert to fiat currency, the inherent risks are exchange rate volatility, moving the cryptocurrency around and educating accountants and auditors.
As for the risk of money laundering, he stresses that blockchain transactions are traceable and when users cash out their Bitcoins, law enforcement ‘will be able to trace them back’.
With volatility, hedging is a good strategy, but Michael Meisler, former cryptocurrency tax leader at EY, believes hedging to long Bitcoins could be ‘very expensive’ due to its volatility, with costs depending on ‘how liquid Bitcoin really is’.
For companies asked to accept payments in Bitcoin in El Salvador, he recommends investing with specialists who understand when to sell or hold, considering that there may be ‘some big opportunities’, depending on ‘how the asset moves over time’.