El Salvador’s Bitcoin Experiment: An Economic Gamble
On June 5th, 2021, attendees of the Bitcoin Conference in Miami witnessed a dramatic turning point for the world of cryptocurrency. Bitcoin fanatics eagerly listen to young crypto entrepreneur, Jack Mallers, as he discusses the future of cryptocurrency and its ability to tackle issues with our current financial institutions. Taking the audience by surprise, Mallers then introduces an unexpected speaker: El Salvador President Nayib Bukele. Appearing virtually through a video recording, Bukele announces El Salvador’s plan to adopt bitcoin as a legal tender, as all businesses in El Salvador shall now accept bitcoin as a valid form of payment. El Salvador is the first country in the world to take this step. An enthusiastic crowd erupts in cheer, and many film the historical moment on their phones. Applause multiplies as Mallers exclaims the phrase, “one small step for bitcoin, one giant leap for mankind” .
Over 1000 miles away in El Salvador, Salvadorans are taken by surprise. Rather than hearing from their president himself, many El Salvador citizens first discover this policy through social media coverage of the event. Regardless, Bukele’s bitcoin bill was passed merely three days later and El Salvador officially became the first large-scale bitcoin experiment . Debates immediately erupt about the feasibility of such a change and how it may impact the future of El Salvador’s economy and zooming forward to 2022, the bill continues to spark controversy around the world. Was El Salvador ready to take on such a drastic financial shift? How has the bill withstood the wild fluctuations of the bitcoin market? Is bitcoin doing more harm than good for El Salvador?
The quick answer is yes: bitcoin has done more harm than good. This applies not only to the El Salvador economy, but to the Salvadoran citizens directly impacted by the abrupt actions of their spontaneous president. Despite taking the world by storm, cryptocurrency is still a very new technology and El Salvador lacks the infrastructure and financial backing to support a widespread version of it. President Bukele’s futuristic bitcoin aspirations clash with the faltering economy of a developing nation, leaving Salvadoran citizens trapped in the crosswinds of financial turmoil. In order to fully understand the scope of this issue, one must first examine El Salvador’s history with bitcoin, alongside why President Nayib Bukele made the decision to transform El Salvador into “Bitcoin City.”
Bukele’s bitcoin bill is not El Salvador’s first bitcoin experiment. El Zonte, a small surfing village off the coast of El Salvador, already hosts an intricate crypto economy within itself. In late 2019, an anonymous American donated 12 bitcoin, worth over 300,000 US dollars, to El Zonte to jumpstart the experiment. Now, El Zonte residents use digital wallets “Bitcoin Beach” and “Strike” to facilitate their bitcoin transactions . A local charity called Hope House uses cryptocurrency to fund its social-good endeavors, as founder Jorge Valenzuela praises the technology that “changed the narrative about El Salvador, from being a dangerous country to a nation of crypto assets” .
After witnessing El Zonte’s relative crypto success, President Bukele was quick to collaborate with Strike CEO Jack Mallers, who views cryptocurrency as the key to uplifting impoverished nations. In the Miami bitcoin keynote, Bukele explains that “adopting bitcoin will attract foreign investment and foster cheaper financial services” . Other goals include reducing the strong reliance on the US dollar and boosting domestic consumption in El Salvador . Nonetheless, the overarching goal of Bukele’s bitcoin initiative is accessibility. In a world where the global economy lies in the hands of world superpowers and multinational corporations, steady access to financial services and investments is a luxury reserved for richer countries and individuals. El Salvador Tourism minister Morena Valdez explains that the “goal is to give options to the 70% of Salvadorans without bank accounts.” Bukele also encourages the use of bitcoin to facilitate the 6 billion dollars worth of remittances that are sent each year . This would void the transaction fees from money transfer companies and give Salvadorans more financial agency to control their own assets.
After outlining the goals of his policy, Bukele’s next challenge was to put the initiative into fruition and make bitcoin mainstream. In order to encourage Salvadorans to start using bitcoin regularly, the El Salvador government developed an e-wallet called Chivo Wallet and offered $30 in bitcoins to those who sign up . Prior to adopting the currency, Bukele acquired 400 bitcoins to jumpstart his nation’s crypto engagement. Since 2021, Bukele has bought a total of 2,301 bitcoins for the government, an amount worth nearly 100 million dollars at the time . With a new e-wallet and loads of bitcoin reserves, El Salvador was poised to make crypto history. However, the nation’s reality was far from that.
Bukele’s bitcoin policy appears rushed and an unnecessary sense of urgency left El Salvador scrambling to keep up with their modernized currency. Jorge Hasbún, the head of El Salvador’s Chamber of Commerce and Industry, was shocked when he first heard of the policy, concerned that the “initiative was rushed through without consulting El Salvador’s stakeholders or private sector” . Because the policy lacked thorough consultation, rules and regulations for the growing bitcoin market were minimal, if any, and Salvadoran citizens were unsure of how to use new bitcoin services.
Therefore, Bukele’s bitcoin initiative was and still is highly unpopular amongst the Salvadoran public. Technological issues and user setbacks make the currency extremely difficult to use for the average citizen. Wall Street Journal Deputy Editor Santiago Pérez, who hails from Latin America, shares an important concern: “a lot of people don’t have smartphones… and if they do, they don’t have data plans” . This illustrates that despite Bukele’s attempt to improve Salvadorans’ financial accessibility, he fails to account for basic facts- not every citizen has access to a smartphone or reliable internet.
Moreover, even those who do have access to the new technology still encounter an abundance of issues with e-wallets Strike and Chivo. At the supermarket, bitcoin users often stand at the register for 10 minutes waiting for their bitcoin transaction to go through. Due to slow services, login issues, and other technical problems with the Chivo wallet, most vendors prefer to conduct business using cash. Not only is cash easier, but it is what they are used to. Additionally, most e-wallet apps require users to transfer money from a debit card or their bank, which creates a barrier for the 70% of Salvadorans without bank accounts, ultimately defeating Bukele’s purpose of going “bankless.” Unfortunately, the inconveniences do not stop here. Bitcoin user José Deras drives for two hours at a time to reach the single bitcoin ATM near him; however, in one case, the ATM had run out of cash and José was forced to leave empty-handed . These are only a few of the many instances where bitcoin brings immense difficulty to the Salvadoran public.
Thus, difficulties in using crypto services lead citizens to lose confidence in Bukele’s bitcoin initiative. As confidence is lost, bitcoin users dwindle. The El Salvador Chamber of Commerce reports that “only 14% of businesses have made sales accepting bitcoin” . According to a poll released by the Central American University in El Salvador, “more than 65% of Salvadorans don’t want the government to spend taxpayer money on its adoption, and 80% have little or no confidence in bitcoin” . After the bill was passed in 2021, protests erupted in numerous large Salvadoran cities, where citizens held signs that said, “bitcoin = pobreza,” which means “bitcoin equals poverty,” and “no queremos bitcoin,” which means “we do not want bitcoin” .
The true value of a currency is based on the trust that citizens give to their government. Support for President Bukele remains strong in cities such as San Salvador, however, those same supporters refuse to trust cryptocurrency . A 2021 study by the National Bureau of Economic Research reveals that only 20% of Salvadorans who downloaded the government-issued e-wallet, Chivo, continued to use it after spending the $30 cryptocurrency reward credit . This lack of trust is a massive barrier to the adoption of bitcoin in El Salvador and prevents any formative change. WSJ Editor Santiago Pérez accounts for Salvadoran concerns, explaining that “one big reason is because people don’t want their wages to be denominated in Bitcoin. It’s related to the sharp fluctuations in value that bitcoin has” .
However, Salvadorans are not the only ones apprehensive about the volatility of the bitcoin market. Both the International Monetary Fund (IMF) and the United States have shown massive concern for El Salvador’s economy following its adoption of bitcoin. Prior to the bill, El Salvador was already facing economic headwinds with a significant budget deficit and limited access to debt markets. On top of this, the El Salvador government struggled with losses from rampant gang violence, and a large portion of the economy operated underground. The government was also in talks with the IMF to get a financial aid package of 1.3 billion to prevent defaulting on debts . However, after Bukele released his bitcoin initiative, the IMF has recommended that El Salvador remove bitcoin as a legal tender and “assess the risk of cryptocurrency before [receiving] a loan” .
Because the cryptocurrency market is so new, its unpredictable nature is the largest concern for El Salvador's already unstable economy. Economists say that the El Salvador government lacks the policy tools and financial backing to protect the economy from bitcoin’s sharp fluctuations, putting the nation's tax revenue and foreign currency reserves at major risk . In fact, the nation has already seen losses. Despite bitcoin’s recent crash in value, Bukele continues to buy more bitcoin and holds tokens worth $74 million today, which is 28% less than the $103 million Bukele originally paid for them . However, why is Bukele continuing to “buy the dip” despite public criticism and major losses? At this point, no one fully knows his true motivations. It may be speculated that Bukele has gone too deep into his bitcoin initiative and refuses to back out and harm his reputation. Or he may be holding on to crypto assets with the hopes that the market will see a spike in value soon. Either way, the El Salvador economy is in an unpredictable position.
Ricardo Castañeda, senior economist at the Central American Institute for Fiscal Studies, refers to the bitcoin market as a virtual casino . Although you can win big, you can also lose big. Individual crypto investments are common because the stakes are much lower. El Salvador’s bitcoin initiative represents the first time an entire nation has entered into this “virtual casino” that is the bitcoin market. President Nayib Bukele is quite literally gambling with the safety and livelihood of his own people.
In response to these concerns, Bukele wrote a tweet directed at the IMF and US lawmakers, saying, “OK boomers… You have 0 jurisdiction on a sovereign and independent nation. We are not your colony, your back yard or your front yard. Stay out of our internal affairs. Don’t try to control something you can’t control” . President Bukele is known to tweet “constantly” and often “furiously,” sometimes up to a hundred times a day .
Thus, President Bukele’s outspoken social media presence and drastic changes to the El Salvador government have attracted negative attention from the Biden administration and international institutions alike. In May 2021, Bukele’s legislators fired all judges from El Salvador’s highest court and replaced them with new judges who ruled that the president may serve two consecutive terms. The El Salvador US Embassy expressed immediate concern that “the ruling violated the country’s constitutional ban on immediate reelection” . The Biden Administration and various international institutions have accused Bukele of seizing authoritarian levels of control over El Salvador and this bitcoin experiment is merely the next step in this control grab.
Salvadoran citizens are also concerned for their democracy, as Bukele’s bitcoin bill threatens their financial agency and personal privacy. For instance, all funds held in the Chivo e-wallet are controlled by the government . This ultimately ruins the idea of a bankless, decentralized currency, and gives the El Salvador government an unprecedented amount of control over virtual funds. Moreover, citizens are unhappy with being legally forced to use a currency they don’t trust. The El Salvador International Truckers Association said that “forcing businesses to accept bitcoin curtails economic freedom” . The sudden changes that President Bukele brought to El Salvador have jeopardized the very democracy that Bukele promised to uphold once elected.
Thus, it is no coincidence that the El Salvador President introduced his bitcoin initiative at the same time his authority was being questioned. Could this attempt to “save” the Salvadoran economy be an ego push? Or is Nayib Bukele convinced that bitcoin can truly transform El Salvador’s economy? Unfortunately for Salvadoran citizens, Bukele does not show any signs of stopping his initiative; only time will tell the impact of this change on their economy. Nonetheless, the nearly 6.5 million people living in El Salvador are a part of history and the nation’s run with cryptocurrency will set a powerful precedent for the rest of the world.
(Written May 2022)
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