In early June, El Salvador announced that it was going to be the first country in the world to accept Bitcoin as legal tender. The cryptocurrency would no longer serve solely as an investment, but rather work alongside the US dollar, as the country moved forward with its aims of digitising finances for a largely unbanked population and making them more accessible.
Money being sent back from abroad currently makes up 20% of the country’s GDP. Its implementation in September has been a turbulent process though, as many Salvadorans do not agree with the change, voicing their opinions through protest on the streets in San Salvador, burning tires and setting off fireworks in front of the Supreme Court. Despite this, others believe that this is a crucial step in digitising finance and moving towards a cashless economy and therefore will be a great change.
The aim of the announcement was to help stabilise El Salvador’s economy. With over $4billion being sent back to the country through remittances each year, the government wanted to find a way in which those abroad would not be charged a portion of their earnings to send money back. Using Bitcoin would be a viable option as it could be transferred fee free from country to country as it has the same value everywhere across the globe – though this value is constantly changing.
When proposed by President Nayib Bukele, the Salvadoran parliament supposedly only discussed the idea for five hours before passing the law, according to Bukele’s political opponent, Johnny Wright Sol. Following a vote that saw 62 out of a possible 84 votes favour the proposal, it was agreed that 90 days would pass before accepting Bitcoin as legal tender was made law.
On the 7th of September, this came to pass, but it was not met with open arms as was expected. This was in large parts to the government backed app, Chivo, failing to support the number of user registrations it faced. Apple and Huawei did not have the app in their stores at the start of the day leaving many frustrated. This came as the president promised $30 of Bitcoin for each user that downloaded the app, as a way of encouraging Bitcoin adoption.
Ahead of the launch, El Salvador bought 400 Bitcoins worth around $20million, helping drive its price above $52,000 for the first time since May. Hours later, Bitcoin had weakened and last traded down 0.51% at $46,561.74. There was a further dip when the law launched in El Salvador with Bitcoin’s price dropping to below $43,000. As this happened, the government bought a further 150 Bitcoin, worth $7million, with president Bukele offering advice to the public, “they can never beat you if you buy the dips.”
Is Bitcoin the Solution?
As the world looks to become cashless, it seems only inevitable before transacting with digital currencies becomes the norm. When looking internally, 70% of Salvadorans are unbanked with no access to financial services. This change of tender towards Bitcoin would provide them a route to these services they would not have previously had access to before. One must also look at the current situation in the world and how the pandemic has affected cash first countries. By introducing Bitcoin, not only will people have access to financial services, but it will also decrease the spread of the virus as the transfer of cash was a very potent way of spreading it.
Bitcoin being recognised and traded globally means visitors in the country can come prepared having bought Bitcoin in their own countries. This means they do not have to worry about currency exchange rates. Should this idea be adopted in other countries going forward, El Salvador will be recognised as the initiative leader that took the first step. Matt Blom, Head of Sales Trading at EQONEX said, “The people of El Salvador are now carrying the flag for crypto. Utilising a digital currency as a means to transact outside the banking system for daily activities is a watershed moment.”
Could Bitcoin be a problem?
Despite the positive possibilities that could come of the new legislation, there are some reasons this passing of law is not necessarily a step in the right direction. In the leadup to the implementation, the El Salvador government reached out to The World Bank for help to prepare the country for Bitcoin. The World Bank rejected this request for fear of climate concerns. Bitcoin like all crypto requires the blockchain to work – but running blockchain on such a large scale involves a lot of electricity. Bill Gates told journalist Andrew Ross Sorkin that Bitcoin “uses more energy per transaction than any other method known to mankind.”
Other concerns are that many Salvadorans do not own a smartphone, and are therefore unable to access the new app. Without making the service more accessible, the poor remain poor and are not able to benefit from these changes.
Those in favour of the crypto law would argue that 200 Bitcoin ATMs have been installed throughout the country to make it more accessible, however, once the gratis $30 worth of Bitcoin has been spent, without a mobile to use the app, nothing will have changed. This is especially true as Trading Economics statistics suggest only 33.8% of the Salvadoran population have access to the internet, and even then it may not be a solid connection. Therefore, it seems like El Salvador has skipped a step in its digitisation path: making the proposed idea accessible.
Case study: Nolvia Serrano
The Fintech Times sat down with Salvadoran born, Nolvia Serrano (CMO at BlockBank) to hear what she thought of the announcement, having been in the capital on the 7th of September. She said, “It’s not just about accepting Bitcoin, it’s that people can have the right tools to convert it instantly if they want.”
Serrano continued by explaining the two main priorities for Bitcoin success and to overcome its challenges were transparency from the government and education. “There are many concerns surrounding the Chivo app as people are worried they will be monitored by the government. Businesses do not want to disclose their expenses to the government. Additionally, users want clarity on how the app works – is each transaction recorded on the blockchain or does it work individually? But most importantly, they want reassurance that the app will work.
“Education is one of the most important things. Salvadorans can’t see and use Bitcoin as a casino. The initial dip in Bitcoin on the release date acts as a good lesson on how the asset’s value fluctuates. Banks must help the adoption in order to help teach the public, the vast majority of which don’t know much about Bitcoin, how to use it properly.
“People don’t need to understand the ins and outs of Bitcoin as a technology. They don’t need to understand how blockchain works. They just want a way to transfer money for low fees. Communities are teaching kids on how to use a computer, teaching them a new NET language, and this has been so impactful, there has been a major decrease in young people joining gangs because they now have hope. They may not understand all the technology behind what they’re doing, but they know how to use it.”