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Back in 2007, a journalist opened their article joking that “US dollars can buy anything and everything in the sprawling Central Market in El Salvador’s capital: steaming tortillas, live ducks, bootleg liquor, love potions--even a hit man, if you know whom to ask.”
In addition to dollars, you can now pay for these goods with another currency: Bitcoin.
But in this article, we’ll answer why El Salvador has made made Bitcoin legal tender, which other countries might adopt cryptocurrencies in 2022, and consider whether integrating Bitcoin into the economy truly does make for a promising precedent for other countries to follow.
Why Has El Salvador Made Bitcoin Legal Tender?
Workers in El Salvador used to get their paychecks in the Salvadoran Colon (named after the celebrated “discoverer” of America, Cristobal Colon, aka Christopher Columbus). But then the Colon grew weaker due to “runaway inflation”, and went from 2 colones to 1 dollar at it’s founding in 1892, to 8.75 colones to the dollar in 2001.
The dollar then became the most used currency in the state. As reported in the Los Angeles Times in 2007, “The switch from El Salvador’s former currency, the colon, to the dollar drove up the prices of many staples, as producers and merchants rounded up to the nearest nickel, dime or quarter. Many workers’ salaries never caught up.” For the 6.48 million Salvadorans, that’s been a whale of a problem.
In an effort to lift the curse, as of September 7, 2021 a third currency has been accepted as legal tender in El Salvador: Bitcoin. And while the acceptance of Bitcoin is seen by many in the crypto space as a good thing, not everyone in El Salvador is happy with the situation.
The new law requires all businesses to accept Bitcoin. This seems logical enough—otherwise, it could hardly be considered legal tender. But a reportedly low percentage of businesses have fully adopted the decentralized currency. Perhaps all is not working as planned under the surface?
What is Chivo? El Salvador’s National Crypto Wallet
Numerous sources have noted that it is ironic that a government like El Salvador’s should adopt a currency that was intended to work beyond the confines of the traditional control systems that governments and national banks exert over money.
El Salvador is trying to do just this, encouraging the use of a national cryptocurrency app, called Chivo (a local El Salvadoran word meaning “good”). There are several foreign companies, including the California-based BitGo, behind the app. For now, Chivo only supports Bitcoin and US dollars.
Forbes reports that the number of users is now up to 3 million - or nearly half of the population - but adoption has been slow, in part due to technical issues (Chivo crashed on its launch day).
While half of the population using the app sounds like a lot, it also means that half are not into it, and perhaps not planning to use it at all, even though each new citizen setting up an account automatically received $30 in Bitcoin—no small amount in a country with an average gross income per capita of just $3600.
In an attempt to keep tabs on use of crypto, Chivo wallet only supports transfers to other Chivo wallets. While the use of other wallets is not illegal (yet) it is discouraged. Any Lightning-enabled Bitcoin wallet can be used, but there is pressure to use Chivo. Not only are new accounts preloaded with $30 of BTC (when you register your national ID with the account) but Bukele announced that he’s negotiating with gas stations to give a 20% discount to those who pay using Chivo. After all, governments want to be able to keep track of income for tax purposes.
However, 93% of Salvadoran businesses reported receiving no payments at all in Bitcoin to date.
Criticism of El Salvador’s Approach
El Salvadorian president Nayib Bukele has been roundly criticised for his “mandatory” policy on his countrymen adopting Bitcoin. So said Ethereum co-founder Vitalik Buterin via Reddit. His point is that it is “contrary to the ideals of freedom that are supposed to be so important to the crypto community” to insist on the use of crypto. Crypto, he argues, is something that should empower people, not be forced upon them. It’s also a setup for novice crypto users to fall victim to scams, as there was “no attempt at prior education” before requiring its use. This reaction is quite widespread and not helped by Bukele himself, who has even dubbed himself a “dictator” on his own bio in his Twitter account.
Bitcoin is also highly volatile—that’s why it has resulted in many “crypto millionaires.” Investors love this, but that volatility makes it a potentially problematic tool for ubiquitous use.
Since the Salvadoran economy has long been linked to the US Dollar, it would probably make more sense for the country to adopt a stablecoin like USDC to ensure that vendors are not tasked with the immediate job of selling Bitcoin back to dollars to avoid volatility.
Lessons for other countries from the El Salvador Model
So far, El Salvador’s approach has demonstrated more what not to do than providing a shining template for other nations to follow. Here is a “not to do list” based on expert commentary about the Salvadoran approach to integrating Bitcoin as legal tender:
1) Educate the population on blockchain technology before deploying a new decentralized currency
2) Ensure that participation is voluntary, not mandatory
3) Deploy the change from a trusted, democratic institution
4) Test and re-test the tech before you launch
Meanwhile, other nations are taking notes based on how El Salvador fares.
Brazil and Panama are tipped as next in line to make bitcoin legal tender, while the US, and the UK explore minting their own centralized cryptocurrencies, and China already look ready for a rollout of their government issued CBDC.
Different countries across the world will experiment with different ways of deploying both centralized and decentralized cryptocurrencies, but perhaps what this disparity shows us is that it is the idea of walled-off economies within centralized nation states that is becoming obsolete.
The network of decentralized Bitcoin nodes, which is global, trustless and immutable, will continue regardless.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.