"The purpose of this law is to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out," the law reads.
Earlier Wednesday, El Salvador's President Nayib Bukele sent the law to Congress for a vote. The 39-year-old politician's party holds a supermajority in El Salvador's Congress.
"It will bring financial inclusion, investment, tourism, innovation and economic development for our country," Bukele said before the vote.
Prices can now be shown in bitcoin, tax contributions can be paid with the digital currency, and exchanges in bitcoin will not be subject to capital gains tax.
This development also comes with financial risks to ordinary Salvadorans and El Salvador in general. The cryptocurrency gains and loses huge amounts of value in a flash – and at times overnight.
Bitcoin too volatile to be an effective currency
Critics suggest that bitcoin is not suitable to be an effective currency because of its wild price swings. It's still unclear how El Salvador will ultimately roll out bitcoin as legal tender. (Related: The bitcoin bubble explained: Understanding the mathematics of the inevitable bitcoin crash.)
The U.S. dollar is the country's official currency and El Salvador's economy depends heavily on money sent back from abroad.
The remittances to the country amounted to nearly $6 billion a year – which is almost 20 percent of its gross domestic product in 2019. On Sunday, Bukele tweeted that a "huge chunk" of that $6 billion is lost to intermediaries who take a cut of the financial transactions in dollars.
Bukele believes bitcoin could be "the fastest growing way to transfer $6 billion a year in remittances."
Bitcoin can be used as a legal tender when the law goes into effect 90 days after its passing. The bitcoin-dollar exchange rate will be set by the market. The law also states that the state will "promote the necessary training and mechanisms so that the population can access bitcoin transactions."
Approximately 70 percent of El Salvador do not have access to traditional financial services. Cryptocurrency is seen as a way to increase financial inclusion.
Bukele submitted the law to Congress after he announced last week that El Salvador struck a partnership with digital wallet company Strike to build the country's modern financial infrastructure using bitcoin technology.
Tesla's Elon Musk makes bitcoin's value swing wildly in recent months
In April, bitcoin hit a record high of $64,829.14 but has since dropped by nearly half, according to CoinDesk data. It is still up over 230 percent over the last 12 months. That rise has been attributed to several factors, including rising interest from institutional investors and large companies such as Tesla and Square buying bitcoin.
The price of bitcoin has nosedived after Tesla CEO Elon Musk said his company was suspending plans to accept the cryptocurrency as payment for electric vehicles. (Related: Top bitcoin exchange freezes, arbitrarily shuts down, proving you will not be able to get out of bitcoin when you want to.)
Greg King, CEO and founder of Osprey Funds, a crypto asset management firm, told CBS News that having bitcoin as a legal tender is a "big deal."
"I think it's a major milestone for bitcoin and a very positive development," he said. "It remains to be seen how much adoption will be taken up by their citizenry. But just qualitatively, what it does for bitcoin is further legitimize its status as a potential reserve asset for sovereign and super sovereign entities."
Siobhan Morden, managing director and head of Latin America fixed income strategy at Amherst Pierpont Securities, told CBS News that it's "really early" in the assessment of what the implications are for having bitcoin as a legal tender in El Salvador and how it will work.
"It was a very sudden announcement," she said. "It was pushed through quite quickly. And so, it really raises concerns on how effectively this is going to be executed, and what the implications are for the country, especially in terms of its relations with its diplomatic relations and multilateral relations."
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