Hello, and welcome to another episode of CNBC's  Beyond the Valley. I'm Arjun Kharpal in Guangzhou,  

China, but today we're going to be speaking about  El Salvador because it's become the first country  

to adopt bitcoin as a legal currency. Now, this  is a really big deal because for such a long time  

bitcoin proponents around the world have been  urging countries to adopt bitcoin, to embrace  

the digital currency, and now we have our first  real world example of that. Our first real world  

experiment to see how that plays out. Now it  was president Nayib Bukele, the president of El  

Salvador, who introduced the bitcoin law into the  legislative system. It passed the congress's vote  

and has now been adopted as law and that law is  interesting because it gives some of the reasoning  

around why El Salvador wanted to adopt bitcoin as  a legal currency. I just want to read some of that  

for you. Because in there, it says 70 percent of  the population does not have access to traditional  

financial services, and bitcoin is seen as  a way to potentially help solve that problem  

as well. Now another big part of the picture here  is remittances. This is money Salvadorans outside  

of the country are sending back home to their  families. For example, remittances in 2020 the  

country received nearly six billion dollars  worth of remittances, accounting for nearly  

25 percent of its GDP, and bitcoin is touted as  a way to make remittances, that money transfer  

process faster and cheaper as well. President  Bukele has also claimed that bitcoin could give  

the country a GDP boost. But adopting bitcoin as  legal tender, as a legal currency, what does that  

actually mean? Well according to the law, it means  prices can be expressed in bitcoin. Taxes can be  

paid in bitcoin. It means exchanges in bitcoin are  not subject to capital gains tax as well. There  

is a line in there which is interesting because  it stirred a bit of controversy, and that line  

says this: "Every economic agent must accept  bitcoin as payment when offered to him by whoever  

acquires a good or service." Now, the reason  it stirs some controversy is because it appears  

to compel everyone selling a good or service to  accept bitcoin, but what if they don't want to?  

That's just one of the many questions here,  on top of the fact that we know bitcoin is  

extremely volatile. If you're a merchant, one day  you accept bitcoin as payment and that moves ten  

percent down or ten percent up in the next hour  or so. That volatility, that uncertainty could  

be quite unsettling as well. There's so many other  questions. For example, is El Salvador's digital  

infrastructure ready? Given the fact that this is  a digital currency, there's going to be a lot of  

infrastructure that needs to be put in place, as  well as education for people who may not ever have  

heard of bitcoin. So certainly lots of questions.  To get to the bottom of these questions,  

I'm joined now by Rachel Ziemba, an Adjunct Senior  Fellow at the Center for a New American Security.  

Her focus is very much on finance economics and  the links between those and security issues as  

well. So Rachel, there are a lot of questions and  concerns about El Salvador's move to make bitcoin  

legal tender. One of those is the fact that  the US dollar is already the official currency  

there in El Salvador. What does it mean then by  bringing something like bitcoin into the system?

So the biggest thing is that the government  of El Salvador is introducing bitcoin as this  

alternate legal tender, which basically  means that if one goes into a store  

and does a transaction or has a debt with another  individual, that they have to accept bitcoin.  

So El Salvador is a little bit unique because  it's one of the few countries that uses another  

country's currency as its legal tender. So there's  some countries that peg to the US seller. There's  

other countries that sort of use their own. But  El Salvador is already using another currency  

so they've already ceded monetary  control. What they're doing now  

is they're saying that private sector, that  individuals, have to accept bitcoin. So what's  

unique about that is they're moving from  what has been a rather cash-based economy,  

to one in which bitcoin is a digital asset. So  they're in some ways making several leaps at once.

Yeah there's a lot to unpack  there. I mean, just practically,  

other examples of countries having two  

currencies as legal tenders. I mean, how do sort  of multiple currency systems work in the world?

Sure, so one thing that's unique about El  Salvador is that they have two official  

currencies as legal tender. There's plenty of  countries where you might have one currency,  

but then you go into a shop and they'll accept  another currency - US dollars or euros often - or  

individual transactions will take place in  those countries. You see that a lot in countries  

where the currencies are volatile.  Places like Nigeria, places like Turkey,  

but that's not necessarily official, and  so that doesn't require the shopkeeper  

or whoever to accept that other currency. What's  unique about this beyond the fact of it being  

bitcoin, is that there's two assets that are  not co-moving and one that's very volatileS  

o beyond the digital question, you have a  whole sort of society that is probably not  

used to the sheer volatility of bitcoin  and questions about access to it.

And that's really a huge point isn't it,  Rachel? The volatility of bitcoin. You know,  

I'm a merchant and someone pays me a bitcoin  today. Then there's a big eight or nine percent  

crash the next day, and now I've lost that  value. You know, the other question is if you're  

talking about any kind of debts or anything like  that. What price is this going to be determined  

in? Is it going to be in bitcoin, USD? I mean,  is it going to be from the point at which you got  

the debt or when the debt is due? There's so many  questions around that volatility, isn't there?

There are, and I think that's going to mean  a lot of people could lose a lot of money  

or perceived money and value. Particularly  given that El Salvador is a country that  

relies a lot on remittance flows being  sent from the US in particular. It's one  

of the countries that's reliant heavily on  these transactions, and so there might be an  

anticipation that x amount of this transfer  is going to buy y amount of goods at home,  

and there could be a lot of questions there.  As the law seems to be written right now,  

and there are many questions about that. It  seems to require any transaction, that debts  

should be allowed to be settled in bitcoin, but i  think there's a real sort of question about that.  

There are plenty of other transactions globally  that might be conducted in bitcoin. You know,  

rents that are taken, purchases that are made,  but often they're quickly converted into a fiat  

currency. I think there's a real question mark  about how that's going to work in El Salvador,  

and who's going to bear that cost of that  volatility. The risk is that some of the  

average citizens are going to be the ones that pay  for that, as well as the private sector entities  

that are going to be struggling to think about how  are they hedging these risks. There's not a lot of  

tools. There are also other risks involved,  including transaction costs of converting.

And if read the law as it's written, it compels  people, merchants or anyone to to accept bitcoin,  

and they can't refuse that. But the  other point that you've mentioned is  

the fact that there is this kind of digital divide  to some extent in El Salvador. Given the fact that  

that bitcoin is seen as a digital format,  that can make things very difficult, right?

I think that's that's true. El Salvador is a  country where the majority of transactions to this  

point have been cash based. Because the US dollar  is legal tender, that actually has meant that  

the government has had to import and make  sure there's sufficient dollars available.  

The u.s government you has facilitated. I mean,  the amount of dollars used in El Salvador are a  

drop in the bucket of the turnover of  the US dollar markets on a daily basis.  

But that sort of transition, question marks of  what happens if cell service or wi-fi service goes  

down. What about people losing access to perhaps  their accounts? There's all sorts of things that  

we see in other countries that I think could  be magnified if this was something that was  

going to be legal tender, as opposed to just  an alternate means to say get money out of the  

country. In El Salvador's case, I do think this is  really a story of trying to rebrand the country,  

provide some buzz, but also try to perhaps  reduce some of the reliance on the US.  

But I think it may create a whole number of other  problems while trying to alleviate one problem.

What would you say are some  of those other problems?

Sure so I think this question of connectivity  This question mark of whether there's going  

to be local mining of bitcoin and what the  electricity bill would look like for that.  

Question marks about whether this is going  to backdate past transactions versus future  

transactions. Question marks about what happens  if the volatility leads to significant losses.

What would you say then are the main motivations  behind El Salvador's decisions there? Because you  

mentioned an interesting one just now, and that  was around reducing reliance on the US dollar. Why  

is that important, and what do you think some of  the other considerations or motivations are here?

Sure. So El Salvador adopted the US  dollar more than, around 20 years ago,  

and they did that. They're not the only country  that uses the us dollar as legal tender.  

Countries like Ecuador do it as well. Other  countries peg to the US dollar: Hong kong,  

the Gulf states, just to name a few. All of  these countries in different ways are looking  

for currency stability that comes from sort of  pegging to an external hegemon or external entity.  

Now we could look at it and say the dollar is not  super stable. It fluctuates against other major  

currencies. It fluctuates against commodities.  It fluctuates against these issues. But a  

country like El Salvador, which had gone through  cycles of boom and bust and inflationary cycles,  

they were basically tying their hands and  saying we can't manage our own monetary  

policy, and so we'll just sort of import the  monetary policy from the Fed. That can create  

its own problems because the Salvadorian economic  cycle doesn't always line up with that of the US.  

So you could have monetary tightening at a time  when the alternate was needed in El Salvador,  

but I digress. The main issue here I think is a  challenge that because of the reliance on the US  

dollar, there's a need for strong correspondent  banking relationships with the US. There's a  

need for intermittent importing of the physical  currency, particularly sincedollar bills do wear  

out right over time. And as the US has more and  more of a focus and concern about anti-corruption.  

We've seen the White House label corruption  as a national security challenge. We have  

several members of the government of El Salvador  under investigation for money laundering issues.  

It strikes me that looking for alternate  ways of transferring funds, of transferring  

wealth and generating wealth, that don't have  as much of a US exit would be attractive. The  

challenge is that the US Treasury has a long  arm, and we know that there's a lot of extra  

territorial application of sanctions and  other measures, not only when you're using  

the US dollar. So I don't think that this move  to bitcoin necessarily removes these concerns.

Rachel, I do want to ask, is  there is there an economic  

argument here? I want to read you something  that President Bukele said. He said,  

"Bitcoin has a market cap of 680 billion dollars.  If one percent of it is invested in El Salvador,  

that would increase our GDP by 25 percent."  Obviously, that's not entirely correct,  

but will this have effect on growth at all? Or can  it have an effect on growth at all in El Salvador?

So i think it can have an impact. The question  mark goes back to, does adopting bitcoin as  

a legal tender lead to new innovation  in bitcoin and blockchain technology?  

Does the government do other policies  perhaps to encourage bitcoin farming or  

that innovation? And we've seen other countries  in places like Bermuda and elsewhere, sort of  

invest a lot in kind of digital sandbox.  Without adopting another currency, they've  

been able to sort of develop this industry.  I think the key is it's not just about the  

adoption. It's about all the other infrastructure.  Just having a certain amount of bitcoin present in  

the country doesn't necessarily increase GDP.  GDP is about what's produced in the country, so  

the assets matter. The question is, are the assets  being deployed to build new real estate projects?  

Are people investing in new businesses? So I  would say that domestic economic policy, any sort  

of government investment projects, those probably  matter more than just the use of bitcoin. I mean,  

anything that makes it easier for foreign and  local investors to set up businesses, to create  

value, that's going to be what the game changer  is moreso than just what's the legal tender.

Great. Rachel, do you think there are other  countries at this point looking at this?  

Can you see any countries around  the world that might find bitcoin  

an attractive option also to make it legal tender?

Sure. So there are. I've heard of some other  countries that are considering it, particularly  

some of El Salvador's neighbors. In fact, there  does seem to be a little bit of copycat sort of  

activity. I think in general, what i think we'll  see more of, is countries using and adopting  

blockchain technology and perhaps developing their  own digital assets. We've had a big increase,  

and I'm sure you've talked about it a lot on  the podcast, we've had a big increase in central  

bank digital currencies interest, obviously pilot  projects. That lowers transactions costs. It also  

probably increases the ability of governments  to monitor activities. For some countries, that  

might be a design feature, not a flaw. I could see  more countries wanting to make it easier for their  

population to engage in financial transactions,  and lower those costs, reduce some of those  

transactions costs, and while the government  and the central bank still maintains a degree  

of control over capital inflows. So I definitely  see that happening more with large countries,  

but even some of the smaller ones, you know  moderate size emerging markets, I see them  

preferring that sort of control over what's  transiting through their their financial borders.

Great. Rachel, yeah we certainly have spoken a  lot about central bank digital currency. It's  

an interesting topic. I think that's gonna have to  be another episode though at this point. Thanks so