The world is going digital at an unprecedented rate and money, in its usual attempts to make the world go around, is no exception. Many countries today have been toying around with the idea of launching a national digital currency, with China leaving most of the world behind in this digital race. Another route is the adoption of existing cryptocurrencies as a national currency, and leading the world in this front is none other than El Salvador. 

The El Salvadoran Bitcoin Law

On the 4th and 5th of June 2021, cryptocurrency enthusiasts landed in Miami for Bitcoin 2021, labelled the biggest Bitcoin event ever, where a crowd of 12,000 people spent a weekend discussing all things crypto. At this event, El Salvadoran president Nayib Bukele surprised attendees by letting the world in on his plan to make Bitcoin legal tender in the Latin American nation. On June 9, El Salvador’s Congress voted to make El Salvador the first nation in the world to officially label Bitcoin legal currency, which was declared by Bukele in a jubilant tweet.

The new law states that Bitcoin is an acceptable currency to pay debts and taxes, and mandates that every business in El Salvador accept Bitcoin as legal tender for goods and services, unless unable to provide the required technology. 

Bukele’s primary motive behind this move is to promote foreign investment by attracting cryptocurrency enthusiasts. Additionally, he claims that introducing bitcoin as legal tender will make it cheaper for expatriate Salvadoreans to send money home. More than two million Salvadoreans live outside the country and send remittances back to their families, totaling around $4 billion (or £2.9 billion) – nearly 20% of the country’s GDP.

The Digital Dictator

Bukele’s vision for El Salvador makes Bitcoin look like the nation’s golden ticket to financial freedom. El Salvador’s government established its own digital wallet, called ‘Chivo’ (a slang term for cool). The country also freely distributed $30 handouts of Bitcoin to encourage engagement at the beginning of the September rollout. Interestingly, Chivo is run by the government and is not open source. The problem with this is that the Bitcoin blockchain is transparent, making it more credible but specifically vulnerable to government tracking. 

With Bukele in charge, this becomes a little creepy. 

In February, Bukele’s party, New Ideas, won a super-majority in the legislative elections. Afterwards, and a little before the Bitcoin news broke, the 40-year-old Salvadoran president sacked members of the judiciary and fabricated his own massive backing in the high courts of the country. Five judges were fired and replaced by Bukele sympathisers in May. The supreme court of El Salvador secured Bukele a judgement that would allow him to run for a second consecutive term in 2024, in violation of the nation’s constitution, with all five new judges ruling in Bukele’s favour. 

Bukele argued that legalising Bitcoin would allow El Salvador to embrace a higher degree of foreign investment. Somewhat ironically, however, the move prompted a notable rating agency, Moody’s, to downgrade El Salvador’s debt deeper into junk territory. 

Some crypto-enthusiasts have dubbed Bukele’s Bitcoin advancements a ‘game changer’ that will help make the world ‘freer’, yet others have voiced macroeconomic, financial, and legal concerns regarding the cryptocurrency’s rollout. Gerry Rice, a spokesman for the International Monetary Fund, has asserted that “crypto-assets can pose significant risks, and effective regulatory measures are very important when dealing with them.”

The Other Side of the (Bit)Coin

Another vital concern is Bitcoin’s volatility. Earlier this year, China declared all cryptocurrency transactions illegal after spending several months cracking down on the digital currency over concerns of volatility and possible money laundering. The price of Bitcoin subsequently fell by over $2000 (or £1460). Such volatility could expose El Salvador to greater financial instability. The decision to adopt such unstable currency is odd in a country that jettisoned its own currency, the colon, in 2001 in favour of the US dollar precisely to enjoy higher levels of economic stability. 

The World Bank rejected El Salvador’s request to guide its transition to Bitcoin, citing Bitcoin’s lack of transparency and the environmental costs of mining Bitcoin. Bitcoin mining consumes 91 terawatt-hours of electricity in a year— i.e. more than seven times Google does annually. Bukele has, however, responded to this by making it clear that he had ordered a state-owned geothermal electricity company to power the mining process through renewable resources from the nation’s volcanoes. 

On the other hand, many people find El Salvador’s decision a little oddly timed and a possible distraction from Bukele’s above-mentioned shady politics. Intensifying this is that few Salvadoreans seemed to want Bitcoin in the first place. A survey by the Central American University found that only 4.8% of the 1281 El Salvadorans they asked understood what Bitcoin was and how to work with it, and higher than 68% said they disagreed with using it as legal tender. 

The Outcome 

It might still be too early to fully decide whether El Salvador’s latest gamble, along with Latin America’s continuously bubbling interest in cryptocurrencies, will pay off. Daniel Hercules, a taxi driver in El Salvador, told the BBC that only around “10 percent of customers prefer to pay with Bitcoin.” Meanwhile, the government has reportedly started offering discounts at some gas stations for payments made through the Chivo wallet. 

There is substantial uncertainty surrounding the sustainability of growth and future demand for Bitcoin in El Salvador. For one, the Salvadoran Foundation for Economic and Social Development reported that more than 12% of consumers used crypto one month into its launch. However, most of the nation’s remittances still reach El Salvador via money transfers, as many do not trust the potential volatility that accompanies Bitcoin. 

So far, only a fraction of the country’s businesses have begun to accept Bitcoin payment and many have found the Chivo app riddled with technical problems. Some workers claimed to have lost money when trying to withdraw cash from the Chivo digital wallet. In spite of this, enthusiasm for digital alternatives to cash is only bubbling up in Latin America. Many Cubans have upped their Bitcoin use due to the exit of multiple payment channels such as Western Union after President Donald Trump imposed sanctions in 2020. Argentina’s largest futures market is working towards becoming the first Latin American exchange to launch regulated Bitcoin features. Only time will tell whether this Latin American crypto craze will amount to something substantial or if it will turn into a bubble with a rather disastrous ‘pop’!