On September 7, El Salvador became the first country in the world to adopt Bitcoin as legal tender. From now on, citizens can buy groceries or pay for public utilities using the cryptocurrency. A new digital wallet called “Chivo” has been introduced by the government to facilitate such transactions. While Bitcoin enthusiasts are heralding the start of a new era, many ordinary Salvadorans are less optimistic.
The latest currency reform is the brainchild of president Nayib Bukele. An extravagant figure, Bukele has recently called himself “the coolest dictator in the world”. The ambitious plan was announced by the president himself at a pro-crypto conference in Florida. Mr. Bukele assured the audience of tech-savvy entrepreneurs that adopting Bitcoin “will generate jobs and help provide financial inclusion to thousands outside the formal economy”.
His claims may have some merit. At the moment, more than two thirds of Salvadorans do not have a bank account. The new Chivo Wallet can function as a convenient, app-based alternative and may thus increase citizens’ access to financial services. Indeed, the platform has already managed to attract more registered users than any private bank in El Salvador. The country also has a large diaspora population, most of which is concentrated in the US. Chivo is likely to make life easier for these expatriates by lowering the transaction costs of remittances which account for more than 20 per cent of El Salvador’s GDP.
Nevertheless, the biggest benefit of this reform may well lie in its unprecedented magnitude. This is the first time that blockchain technology has been used on a nation-wide scale. Bitcoin currently receives large institutional support, which means that El Salvador has the potential of becoming a regionally-significant sandbox for financial innovation. The unique regulatory environment is likely to attract the attention of fintech companies, blockchain startups and digital nomads. In fact, the government has already confirmed that Bitcoin investors will be exempt from the capital gains tax. The adoption of Bitcoin may thus place El Salvador at the forefront of the emerging ‘crypto economy’ and attract foreign investment which is currently badly needed to alleviate the economy’s structural challenges.
When examining the rationale for the recent reform it is also important to keep in mind that up until early September the sole circulating currency in El Salvador was the US dollar. The country underwent a process of dollarization back in 2001 in an attempt to tame inflation. However, the adoption of the dollar has also meant that El Salvador had to surrender much of its monetary sovereignty. Bitcoin, on the other hand, can be described as a decentralized financial system that functions independently from any central authority. Its adoption may well give Salvadoran policy-makers increased monetary maneuverability by lessening the influence of the US Federal Reserve that is currently pursuing a strategy of unprecedented monetary expansion. President Bukele’s recent spat with the Biden administration only reinforces the suspicion that the adoption of Bitcoin is part of a broader strategy to increase financial autonomy from the US. Such a challenge to American monetary dominance has not gone unnoticed, however. The IMF, which is currently in negotiations with El Salvador over a $1bn loan deal, has denounced the move, while the international credit rating agency Moody’s has recently downgraded the country’s rating. El Salvador already suffers from a huge fiscal deficit, and the latest developments will only place additional strain on its public finances.
The negatives, however, are far more than just international disapproval. The decentralized nature of Bitcoin means it is inherently entwined with major volatility. Both rapid and huge swings in the cryptocurrency’s value are common occurrences and leave investors, and users, highly vulnerable. Even on the day of Bitcoin’s adoption in El Salvador, the cryptocurrency’s value decreased by more than 10 per cent. Such volatility can erode citizens’ savings and make both business and international trade logistics increasingly difficult.
The implementation of far-reaching financial innovation also requires significant institutional resilience and strong public support. Unfortunately, the latter is also lacking; almost 70 per cent of citizens disapprove of the recent changes. The day of Bitcoin’s adoption was marked by unprecedented anti-Bukele protests, although the president remains just as determined to implement his vision. Another issue is the lack of technological readiness; less than a third of Salvadorians have access to the internet and the Chivo Wallet itself has been plagued by irregularities and glitches. These factors are likely to inhibit the success of Bitcoin’s adoption across El Salvador, and can pose significant security risks, including the possibility that users might be locked out of their digital wallets due to forgotten passwords. A much greater hazard, however, exists in the fact that the country suffers from a high level of gang violence and hosts an extensive drug trafficking network. The anonymity provided by Bitcoin’s blockchain technology is likely to be exploited by organized crime groups, severely complicating the fight against corruption in El Salvador and the wider Central American region.
Many developing countries are in fact closely following El Salvador’s experiment. If President Bukele’s strategy pays off by successfully attracting foreign capital and improving financial inclusivity, it could have sweeping effects on financial legislation across the global south. Unfortunately, the internal turmoil and international criticism that Bitcoin has brought upon El Salvador is less than reassuring. Thus, while the benefits of Bitcoin still belong to the realm of potentialities, the negatives of the reform have been very real and immediate.