Effective September 7, 2021, El Salvador became the first country to adopt bitcoin as a legal currency. “The Bitcoin Law,” which was passed by the Legislative Assembly of El Salvador on June 8, 2021, is the first law of its kind in the world. Bitcoin is now an official currency of El Salvador alongside the U.S. dollar.
CNBC also adds that the move makes El Salvador the first country to officially have bitcoin on its balance sheet and hold it as part of its reserves.
For the first time since “cryptocurrency” was a real word, bitcoin is no longer just being treated as a store of value or solely as a digital currency. It’s being treated as a living and breathing currency for everyday use. As quoted by the BBC , Ed Hernandez, an El Salvador shopkeeper, said that he believes his store could turn over $1000 each week in bitcoin payments.
The law also means that El Salvador’s citizens can pay taxes in Bitcoin. Money exchanged into bitcoin will also not be subject to capital gains tax. L ast month, in preparation for September 7th, El Salvador began installing 200 ATMs around the country to allow citizens to convert between the country’s two official currencies. It also launched its own digital wallet called “Chivo,” which awards users $30 of free Bitcoin to encourage adoption.
El Salvador: Nothing to Lose
For now, this bitcoin experiment is only days old, and we won’t truly know how successful it will be after many years. However, El Salvador truly has nothing to lose. According to Dartmouth University , El Salvador is “one of the poorest countries in the western hemisphere, with low per capita income, chronic inflation, and high unemployment.”
Based on data from the International Monetary Fund, as of 2021, El Salvador ranked only 17 out of 33 countries in Latin America and the Caribbean according to estimated GDP (PPP). To put into perspective how poor this is, Venezuela is a country that’s been in a political downward spiral for years. It is also ripe with “skyrocketing hyperinflation, power cuts, and shortages of food and medicine.”
It’s ranked 10.
If you were wondering, El Salvador’s GDP stats are also only good enough for 103rd and 105th in the world based on nominal and PPP, respectively.
So Why Adopt Bitcoin?
“We must break the paradigms of the past,” said President Bukele. “El Salvador has the right to advance towards the first world.”
Outside of bringing El Salvador into the “first world,” Bukele, considered a right-wing populist president, gambled on the cryptocurrency for several reasons.
Initially, he made this move as a way to spur investments into El Salvador. Plus, he did this as a way to help the roughly 70% of Salvadorans who don’t have access to “traditional financial services.” The CEO of Strike, a digital finance company that helped with the logistics of the new law, also told CNN that over 70% of the country’s “active population” does not have a bank account. Buekelealso previously said that bitcoin could improve financial inclusion and access to wealth in a desperately poor nation.
Proponents of the bitcoin experiment add that adopting bitcoin will make it cheaper and more accessible for migrants to send money home to El Salvador. This could be huge for the country’s GDP. Data from the World Bank, as reported by CNBC, show that such remittances account for over 24% of the country’s GDP. This also affects around 360,000 households.
With such a dependence on this type of income, El Salvador has a population with desperate needs to receive money instantaneously and seamless access. Until this law was formally in effect, remittances were delivered by Western Union or other money transfer services which are centralized and highly regulated. Sending funds can be complicated, involving an in-person visit to an agent’s office and proof of identity for both the sender and receiver. There are over 500 Western Union offices across El Salvador. However, you have to remember that 26.56% of the population is rural and underserved.
With bitcoin, finance has been truly democratized. Transfers are more accessible and more convenient. Realistically, all you need is a mobile phone to send or receive funds, regardless of location.
Lastly, it looks like people could already be warming up to using bitcoin in everyday life. ”Just walked into a McDonald’s in San Salvador to see if I could pay for my breakfast with bitcoin, tbh fully expecting to be told no,” Aaron van Wirdum, a journalist for Bitcoin Magazine, said in a tweet that was retweeted by President Bukele.
“But low and behold, they printed a ticket with QR that took me to a webpage with Lightning invoice, and now I’m enjoying my desayuno traditional!” he added.
Is El Salvador Ready?
The world is watching what happens with this bitcoin experiment in El Salvador. Other Latin American countries are especially paying close attention. Driven mainly by inflation, the reliance on the U.S. dollar, and attracting tech entrepreneurship, Paraguay, Panama, Brazil, Mexico, and more have indicated that they could follow suit.
In the first three days of El Salvador’s experiment, though, calling it rocky is an understatement.
On the first day that bitcoin became an official El Salvador currency, it crashed to its lowest level in nearly a month, falling from $52,000 to under $43,000 at one point. As of September 9, 2021, it’s trading at about $46,162, an overall drop of more than -11% since the law took effect.
An opposition politician said bitcoin’s crash caused one of Latin America’s poorest countries to lose $3 million.
Remember Chivo, the country’s digital wallet awarding users $30 of free Bitcoin to encourage adoption? It was already taken down after Tuesday morning’s launch because it couldn’t handle the user capacity or keep up with the influx of registrations. Platforms such as Apple and Huawei also weren’t offering Chivo.
Anecdotal evidence also suggests that most businesses are completely unprepared unless you’re McDonald’s, Pizza Hut, and one of a few stores. The Financial Times surveyed over 20 enterprises in the country’s capital and found that only three had immediate plans to accept bitcoin. Others either hadn’t started their preparations or were actively resistant.
Not to mention, the move to adopt crypto appears to be deeply unpopular. A survey conducted by the Central American University found that almost 70% of Salvadorans profoundly disagreed with adopting bitcoin as a legal tender. In fact, according to the BBC, around 1,000 protesters took to the streets of San Salvador, opposing the adoption of Bitcoin.
The World Bank also refused to help the Salvadorian government implement the new system, citing environmental and transparency concerns. It also raised questions about whether bitcoin will ever be suitable for making everyday payments. President Buekele would like you to believe that bitcoin could save the country $400 million a year in transaction fees on funds sent from abroad. But, data from the World Bank and the government says otherwise. The BBCcalculates this figure to be closer to $170 million.
Lastly, El Salvador is one of the poorest countries in the region, and an unpredictable vehicle like bitcoin may expose an already shaky economy to more uncertainties. Bitcoin can see massive gains or losses in a flash, exposing ordinary Salvadorans to even more financial risks than they already had. Plus, in a country already ripe with crime, some say the adoption of bitcoin may encourage more illicit transactions.
The Takeaway: It’s a Learning Curve
You can’t answer whether or not this experiment is a success in a matter of 3 days, 3 weeks, 3 months, or even 3 years. However, President Bukele acknowledged that there would be a “learning curve.” He admitted that “every road to the future is like this, and not everything will be achieved in a day, or in a month.”
However, not even he could have envisioned El Salvador’s bitcoin rollout to be this rough back in June.
“It was a very bad day for President Bukele, his government and his experiment,” opposition politician Johnny Wright Sol told the BBC.
“The majority of the population knows very little about cryptocurrencies. What we do know is it’s a very volatile market. Today that was surely made manifest.”
Wright Sol added that bitcoin was not an apt national currency and was rushed through:
“The Bitcoin law was approved in parliament with hardly any debate. It took only about five hours to go through. We’re not cryptocurrency or Bitcoin haters, but we don’t believe that it should be compulsory that businesses should be obligated to accept Bitcoin in payment. The state is backing these payments and assuming the risk but at the end of the day us taxpayers are all the state.”
We will see what happens. Early results, however, are not encouraging.