El Salvador is a Central American nation with a population just shy of 6.5 million. Known as the “Land of the Volcanoes” the country is best recognised as a surfer’s paradise with epic landscapes and beautiful scenery.
Like many regions in the Central Americas, El Salvador has had a difficult political and economic past. War, poverty and persistent levels of poor economic growth have made life difficult for many Salvadorans. Of late, the country has been the focus of many news outlets but not for reasons that may be expected. On the 7th of September, 2021 the nation passed “The Bitcoin Law” making the monumental move of officially recognizing Bitcoin (BTC) as legal tender.
Street merchants, financial institutions and government bodies are now legally obligated to accept cryptocurrency as payment. It also paves the way for the government to disburse subsidies in it. The strongest believers in the monumental technology that is Bitcoin will have dreamed that a nation-state would someday adopt the digital currency. Not many would have guessed that the pioneer of such a move would be a region that doesn’t make the cut for the top 100 countries based on GDP (gross domestic product) with an estimated monthly living wage of $325.
The situation raises a multitude of complex questions with the answers being no less convoluted, controversial and somewhat subjective. To break the situation down to its most basic components, one must ask three simple questions – Why, How and What’s next?
A Brief History of Salvadoran Currencies
Historically, methods of payment and means to store value in El Salvador have been less than straightforward, largely as a result of Spanish colonisation and poor economic conditions for the region.
In the mid-1800s, tin sheets were used by farms to pay their employees. These sheets could only be cashed in for goods at the farm store that issued them, creating a monopoly for wealthy farm owners. Silver and gold coins followed as methods of payment until 1883 when the “First Monetary Law” was adopted, Pesos were the newly accepted form of currency.
In 1892, the government renamed the peso to be called the ‘colón’, in honour of the discoverer of America. The colón replaced the peso at par in 1919. It was initially pegged at a 2 colones per 1 U.S. dollar ratio, however when El Salvador left the gold standard in 1931 its value floated. The strength of the ‘colón’ continued to decline for the remainder of the century. Leading governments attempted to introduce some stability to the currency through dollarization.
Since 1993, the Salvadoran colón has been pegged to the U.S. dollar on a fixed exchange rate of 8.75:1. This move was a successful attempt to keep previously rampant inflation at bay and stabilise a struggling economy. The trade-off was that Salvadoran governments had less freedom to spend money, particularly in times of financial crisis. They were also at the behest of U.S. sanctions. As of 2001, the U.S. dollar was made legal tender in the nation and the colón is now rarely used.
Ineffective Traditional Finance:
The implementation of the dollar has somewhat aided the region economically on a macro scale but ground-level factors have been a hurdle for countrywide improvements. A lack of financial institutions and poor infrastructure within the country (making access to the ones that do exist difficult) sees ~70% of Salvadorans without a bank account. Huge numbers of workers immigrate to the U.S. from the region each year (currently there are 2 million Salvadorans living abroad).
Last year, these workers sent home a whopping $6 billion in remittances which accounts for ~23% of the nation’s GDP. Due to the many unbanked individuals in the country, services such as Western Union are often used for these transfers where fees can be exuberant.
Enter President Nayib Bukele:
It’s been under the administration of Nayib Bukele (elected 2018) that the “Bitcoin Law” has come into effect. Bukele touted adopting Bitcoin as legal tender as a way to reduce the fees paid by El Salvador citizens sending and receiving payments from abroad. The president also wanted to rebrand the country from associations with gang violence and a sluggish economy that drives emigration to the United States, to a modern hub of innovation – a crypto pioneer.
In the lead up to the “Bitcoin Law,” Bukele claimed the change could save citizens $400 million each year in commissions for remittances. Furthermore, the goal of the move is to reduce the country’s reliance on the performance of the dollar. “Public finances in El Salvador are on a knife-edge. Public debt stands at close to 90% of GDP and the government needs to find almost $1.5 billion to close the year and pay its obligations,” says Alvaro Trigueros Arguello, director of economic studies at FUSADES, a San Salvador-based development thinktank.
The move towards Bitcoin also aims to improve the economic forecast of the region. The president has explicitly stated foreign crypto investors will be treated favourably and can avail of Salvadoran citizenship should they invest 3 BTC in the area. Since Bitcoin is legal tender, rather than an investment asset, foreigners who move to El Salvador will not have to pay capital gains tax in the country on any profits made if the cryptocurrency’s value increases.
Criticism of the Bukele and The Bitcoin Law:
The implementation of The Bitcoin Law has seen President Bukele both praised and criticised by the masses online. The controversial nature of the situation pins Bitcoin maximalists against those who follow traditional financial channels. President Bukele’s prominent use of Twitter adds further fuel to the debates.
The president has been attacked for “falling in love with his cool millennial president image”. In September, days before the new laws came into practice, a top court in El Salvador ruled that Bukele can run for a second term in 2024, this is in defiance with previous interpretations of El Salvador’s constitution. Some claim Bukele is trying to hold onto power akin to a dictatorship.
The president took no time in responding to this and changed his Twitter bio to “the coolest dictator in the world”. Bukele has been extremely vocal about his certainty that the Bitcoin Laws will aid the country, even claiming El Salvador “bought the dip” during a downswing in Bitcoin’s price. Those in opposition claim Salvadoran citizens are at the mercy of a nationwide financial experiment.
The project’s budget of $200 million equates to about 2.7% of the government’s entire budget for 2021. The ministry for agriculture’s budget by comparison is only about one-third of this. Government bond prices (https://cbonds.com/bonds/10929/) have tumbled since the new Bitcoin policy has been introduced. Some critics claim that Bukele is impeding the recovery of El Salvador’s economy as the new Bitcoin legislation has halted negotiations with the International Monetary Fund (IMF) where the country was seeking a $1 billion assistance package to aid public finances.
Further critics point to the impact the new laws may have on insurance providers and other financial bodies who will be required to accept Bitcoin as a form of payment. Large price swings and Bitcoin’s volatile nature adds further uncertainty to if and how such organisations will cope with the change. It is likely that these groups will convert any Bitcoin received to USD to reduce the risk of holding such a volatile asset long term.
This approach flies directly in the face of the ethos that surrounds Bitcoin. Proponents of the cryptocurrency see it as gold 2.0 – a store of value and a 21st-century hedge against inflation. Only 21 million Bitcoin will ever exist rendering it a finite asset with a limited supply. It is easily divisible, requires no physical space to store and can be transferred worldwide within minutes. Long term believers in the technology argue that these attributes will result in Bitcoins value, and subsequently, price, trending upwards over time and that it should be held in favour of fiat currency.
It will be interesting to observe if any institutions adopt this approach, especially given the current bullish market sentiment in the crypto space. With the recent release of Bitcoin Futures Exchange Traded Funds (ETFs), many analysts believe a crypto bull market will continue until at least the end of 2021 with many believing the currency will peak upwards of $100,000. Some crypto purists feel that “forcing” the implementation of Bitcoin on a national scale goes against the spirit of what true decentralization is.
Bukele has rubbished these claims saying that citizens and institutions can choose whether they want to engage with the cryptocurrency or not. Known for its volatility it is understandable that certain organizations may be apprehensive to hold Bitcoin for too long. However, given President Bukele’s “all-in” approach and the difficult economic situation in El Salvador it stands to reason that some may be tempted.
The introduction of the new legislation saw the Salvadoran government roll out a Bitcoin wallet app named Chivo. All Salvadorans who downloaded the app were given $30 worth of Bitcoin free (~8% average monthly wage) to promote uptake. The government also installed over 200 Bitcoin ATMs where users can convert USD to BTC and vice versa.
Data from CoinATMRadar (a site that publishes Bitcoin ATM locations worldwide) shows that El Salvador now has the third-largest number of Bitcoin ATMs in the world, trailing only the U.S. and Canada (for comparison Ireland has 38 Bitcoin ATMs nationwide). Salvadoran citizens are also incentivized to use their Bitcoin for goods and services, one such subsidiary could be used to buy gas at a 30% discount if paid for with BTC.
The early days of the rollout were somewhat turbulent. The Bitcoin Law sparked the first major protests of Nayib Bukele’s presidency. 8,000 citizens took to the streets to show their disdain for the changes. The protests were mostly peaceful but one area saw the burning of a Bitcoin ATM occur. Polls employed around this time showed that 7 in 10 Salvadorans didn’t want Bitcoin as legal tender.
Many merchants complained of issues with the technology necessary to accept payments in Bitcoin. More took umbrage with accepting payments in the morning that were worthless in the evening due to Bitcoin’s volatile nature. Certain merchants also pointed to the fact that the goods they were selling weren’t worth enough to be paid for by Bitcoin transactions. Regardless, Bukele’s approval rating remained at above 85%.
Technical issues with the Chivo App, internet problems and a sceptical attitude towards the technology have also been impediments to the adoption of Bitcoin in El Salvador. Many reported being unable to accept payments due to a problem with the app or as a result of poor internet connection. Huge numbers of people queued to access the Bitcoin ATMs during the early stages of the new laws but many just wanted to cash out their BTC for USD as quickly as possible. The government included stipulations that withdrawals could only occur after a transaction had been made, this simply led to family members sending each other their Bitcoin to bypass this.
The What’s Next:
Although many voiced their concerns with the initial changes, sentiment in the region may be shifting. In the capital San Salvador, many large chains such as Starbucks, McDonald’s and supermarkets accept the digital currency for purchases, and some smaller businesses are also taking it. President Bukele recently tweeted that the app has over 2.1M active users (not downloads). This means more Salvadorans have Bitcoin wallets over bank accounts – a fairly impressive statistic since the app was released less than a month prior.
He also stated in the tweet (16th October 2021) that 24,076 remittances were received, adding up to $3,069,761.05 (in one day). Furthermore, he claimed that more users are putting USD into the machines as they look to buy BTC, reversing the initial trend where users wanted to cash out their cryptocurrency. This could suggest that Salvadorans are coming around to the potential upsides of Bitcoin and viewing it as preferable to the U.S. dollar.
Some companies in the region are looking at the option of paying their employees in Bitcoin through the Chivo app. This could bring about further economic development if foreign companies could outsource work to El Salvador and pay their employees with Bitcoin without losing much value in transfer fees. It should be noted that many analysts say businesses will likely wait and see how the bitcoin rollout affects El Salvador’s economic stability before striking any major deals.
If accepting a cryptocurrency as legal tender isn’t sci-fiesque enough, Bukele’s administration is currently in the midst of tapping into El Salvador’s geothermal energy banks to power Bitcoin mining stations. The region has 20 “potentially active” volcanoes that run the length of the country. Currently, 21.7% of the nation’s energy comes from renewables. Even this large proportion represents only a fraction of the energy that could potentially be drawn from El Salvador’s volcanoes.
But some potential sites sit miles away from population centres like San Salvador and San Miguel. Connecting them to the power grid would require extensive infrastructure buildout, much of it in inhospitable conditions. Bitcoin mining rigs lend themselves perfectly for this cause. The rigs are highly transportable and require a fraction of the cost, manpower and infrastructure necessary to set up and operate. Miners can be set up in extremely remote locations and can be connected to the blockchain wirelessly.
Furthermore, they can easily be reset if disconnection occurs and can continue mining without issue. This differs greatly from power being channelled to the national grid where costs are high and disconnection can lead to power outages.
Bukele recently revealed the first fraction of Bitcoin (~$250) was mined using volcanic energy in the region but qualified the statement that operations are still in the testing phases. This approach could have monumental impacts the world over. The ability to tap into remote renewable resources and for it to be profitable through Bitcoin miners could incentivize the development of green energy worldwide.
Utilizing “stranded energy” like El Salvador’s remote volcanoes, wasted outputs like the methane flares produced by natural gas mining or unneeded energy from off-peak wind or hydroelectric generation. If Bukele’s plans come to fruition, bitcoin could subsidize the development of a much greater proportion of the country’s previously dormant energy resources.
Eventually, not all power would be used directly for mining, nearby communities could also benefit, and other new industries could even grow from the availability of cheap, clean power. El Salvador’s immense supply of volcanic energy has never been fully harnessed for the betterment of the nation because of technological limitations. By making energy portable, Bitcoin has the potential to improve the economic standing of many nations with underutilized clean power resources.
The situation in El Salvador is quite unique and still in the very early stages. It will take time to know fully whether the move will work out for the nation and whether more countries will follow suit. Ukraine, Guatemala and a handful of other small nations are also considering making Bitcoin legal tender.
Crypto has achieved its highest penetration mostly in countries where banking systems are costly and complicated to use, or where local economies and currencies are unstable. Salvadorans seem to be coming around to the idea that their national currency is the phenomenon of Bitcoin. A cheaper corridor for remittances to enter the country is an objective net positive as a result of the Bitcoin Law. The full scale of pull factors that could promote economic growth in the region and potentialities in the Bitcoin mining sector remains to be seen but carry a lot of promise.
Proponents of the cryptocurrency revel in Bitcoin being recognised on a national level but it is clear there are many headaches and hurdles in store for regulators, business owners and government bodies alike as the growing pains of such a change become apparent. Similarly, the power of Bitcoin cannot and should not be underestimated.
True believers in the Bitcoin revolution have been handsomely rewarded since its inception. Doubters and nay-sayers have been proved wrong time and again. What the future holds for El Salvador is unclear for now, one thing that is certain is that Bitcoin is here and doesn’t like it has plans to go anywhere anytime soon.
Matt is the Chief Marketing Officer at Bitcove, an Irish Cryptocurrency Exchange. As an avid believer in the blockchain revolution, Matt keeps abreast of all the latest in the cryptocurrency world. With academic backgrounds in both Psychology and Movement Science, Matt is no stranger to stringent research and number crunching. He regularly writes informative articles and educational blogs for the Bitcove website to keep the site’s users in the know.
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