El Salvador thinks it has nothing to lose.
In a world first, the small Central American nation began using Bitcoin as its legal tender on Sept. 7. The Bitcoin Law made the cryptocurrency equal alongside the U.S. dollar, El Salvador’s official currency, so that citizens can now use either to pay for goods and services, loans and even taxes. Businesses are required by law to accept Bitcoin if consumers pay with it.
Transactions are made via the government-sponsored Bitcoin wallet app Chivo (Salvadoran slang for “cool”). It’s like Venmo except with two balances: one in Bitcoin and one in USD. Citizens can transfer between the two or withdraw USD via Chivo ATMs around the country. To sweeten the deal, new users get $30 in Bitcoin upon registration.
“Tomorrow, for the first time in history, all the eyes of the world will be on El Salvador,” President Nayib Bukele tweeted a day before the launch.
Eyes were on them, and eyebrows were raised.
After the country’s Legislative Assembly passed the law in June, Moody downgraded El Salvador’s credit rating, turning the country’s debt into junk bonds. The IMF warned of the move’s destabilizing effects and called it “a step too far.”
But Bukele frames the law as his nation’s lifeline, a way to “break with the paradigms of the past” and help the historically poor country “advance toward the first world.”
Bitcoin will cut down on billions in fees from remittances — which account for over a fifth of the country’s GDP — that the millions of Salvadoreans working overseas send home via American banks. Saving in this area is huge for a country that does not have much to export and thus relies on overseas remittances for capital.
Easy access to the virtual currency (who doesn’t have a smartphone?) will help financial inclusion in a country where 70% of the population is left out of the banking system. The plan will also attract much needed foreign investment in the tiny economy. Crypto is the future of the world, and those who shun it are old school.
Will it work? First, let’s take a look at what Bitcoin is.
Bitcoin is a decentralized digital currency not attached to any government. It’s highly volatile because the coin has no intrinsic value, and unlike fiat currency, there’s no central bank to regulate its supply and manipulate interest rates. It is possible for the price to plunge 30% in one day, which fuels worries about the currency’s future.
So yes, you might cut down on remittance fees, but what’s the point of sending money back home if you can never be sure about the amount transferred? The same goes for financial inclusion, which aims to lift people out of poverty by providing them with financial services and helping them save. How would you store value with such an erratic medium?
Another core feature of the coin is its anonymity. Though every single Bitcoin transaction on the planet is recorded in a public ledger called the blockchain, there is nothing to link you to a personal “address” or account number.
Foreign investors will get tax exemption on their Bitcoin profits, which obviously encourages investment – but what kind? With anonymity, Bitcoin may be used in money laundering and other illicit transactions, and in a country that already struggles with rampant organized crime.
This is the part where Bukele assures everyone that he has measures in place to fight against illicit transactions (he doesn’t). But don’t worry: The president has plenty of experience, such as last year when he launched money laundering investigations into news outlets who had criticized him, or the time where he was part of one himself.
Despite his authoritarian tendencies, Bukele’s approval ratings have persisted above an impressive 80% since he was elected in 2019. Part of the 40-year-old’s appeal was his innovation. He dashed off literacy programs, fixes to the health system and financial restructuring where his predecessors got caught up in bureaucracy; the political party he established is literally called Nuevas Ideas (New Ideas).
His Bitcoin Law, though, is deeply unpopular. An August poll conducted by the Central American University found that nearly 70% of those surveyed didn’t want Bitcoin to become legal tender. Thousands have marched on the street to protest against the law.
For one, it felt rushed. Only three months passed between the law’s introduction and its execution, but the government should have built trust before switching to a new payment system, especially with something as new as cryptocurrency and after El Salvador’s rushed dollarization in 2001.
“People, in El Salvador or anywhere else, are not at this point ready to change their behavior. I think it’s something that is ingrained,” said James Rubin, an editor at leading digital currency news site CoinDesk. “The embrace of crypto by the government isn’t going to work its way into what people in individual households are doing.”
It doesn’t help that despite being taxpayer funded, Chivo is a private enterprise run by undisclosed individuals. Oh, but we do know that Chivo’s director is the president’s chief of staff Carolina Recinos, who also happens to be on the U.S. State Department’s list of corrupt officials.
Building trust takes time and transparency; so does education. We can all agree that cryptocurrency is anything but straightforward. How much more so for Salvadoreans who may not have the time or resources to study up on it? Even if the government cannot educate the public in time, it can at least make guidelines clear to businesses. Multiple u-turns on whether accepting Bitcoin will be optional or not does not look good.
Improving the economy is about raising efficiency. Suppliers and businesses have to spend more time and resources monitoring volatile Bitcoin prices. Navigating a new payment system incurs administrative costs, which may be written off only if the new system has tangible benefits. Citizens would also have to weigh whether to use USD or Bitcoin in each transaction, when they could have used the time to engage in more productive activities.
Still, Bukele and Bitcoin supporters insist that crypto is the future. But the truth is, crypto as legal tender isn’t likely to catch on in financially established countries – consumers have no incentive to save or spend in the volatile coin. The same applies to El Salvador, as long as the USD remains an option.
In the long run, focusing on crypto would mean El Salvador has zero control over monetary policies. Even though the country cannot set interest rates right now as it is using the USD, there are still Fed reports and indicators they can consult to adjust to the foreign business cycle. With crypto, anything goes.
According to the IMF, we’d instead probably see central banks around the world launch their own digital currencies, which would combine the benefits of cryptocurrencies and traditional money. El Salvador could also consider switching to mobile banking services such as M-Pesa.
“What they’ve said is, look, this is a way for us to move our economy in a positive direction,” Rubin said. “There’s very little that previous regimes have been able to do to turn El Salvador into some sort of regional economic power or even a country that has an ability to generate a certain amount of wealth.”
“It wouldn’t surprise me if they were thinking, well, what do we have to lose at this point?”