Crypto enthusiasts, investors, and tech personalities the world over were excited to hear controversial President Nayib Bukele’s announcement that his country, El Salvador, will start accepting Bitcoin as legal tender.
This initiative, which could potentially bring unique benefits to the struggling El Salvadorian economy, was embraced by some and viewed with extreme suspicion by others. Is El Salvador a pioneer looking to become an El Dorado of sorts, replacing gold with Bitcoin, aka “digital gold” — or was the subsequent negative reception and occasional outright rejection of his efforts the canary in the coal mine for other other emerging countries adopting similar approaches?
Here’s what you need to know.
President Nayib Bukele announced to a crowded 2021 Bitcoin Conference in Miami that his Central American country El Salvador would be seeking to adopt Bitcoin as legal tender. Currently only the US Dollar is accepted as such. The shift in policy will require every business with the technical ability to do so to accept Bitcoin as payment, extending to everything from street vendors to real-estate agents. Experts remain divided as to the efficacy of such a program, and the policy is one of several proposed by President Bukele that has courted controversy.
Indeed, he is not the first leader from the region to introduce cryptocurrency as an avenue towards remedying economic woes. Venezuela introduced the Petro in 2018 — but the endeavor failed due to utter lack of trust in the government.
El Salvador’s attempt to adopt cryptocurrency is notable because of its decision to use Bitcoin, a far more established commodity than the Petro — a currency tied to the price of oil. Bitcoin is the most prominent of a series of such currencies and is subject to volatile changes in value. Released by an enigmatic anonymous inventor in 2009, Bitcoin uses a distributed ledger to track exchanges and keep records. It is simultaneously difficult to trace and nearly unhackable.
The Potential Risks
Bukele’s decision to endorse Bitcoin as legal tender has been viewed with skepticism by many. Bukele is no stranger to controversy, with many comparing his social media driven ascension to power to that of former US President Donald Trump.
His critics focus on several points:
- First, many in El Salvador lack either the technical know-how needed to use crypto or access to smartphones. Indeed a 2017 study indicates that only 68% of his country has access to smart phones and the remainder is thus unable to use crypto.
- Second, critics argue that this may create greater wealth disparities and pool capital in the hands of the young. Similarly, critics focus on the potential effect the adoption of Bitcoin could have on the economy — he is, after all, doing something which will change the way every citizen in his country does business.
- Another criticism concerns El Salvador’s relationship with the IMF — as the country is seeking USD 1 billion in aid from the organization. This criticism has given rise to setbacks in the adoption process.
- For example, the World Bank recently rejected El Salvador’s request for help with the adoption.
…and Potential Rewards
These setbacks have not deterred Bukele who insists that the economic benefits of adopting Bitcoin far outweigh potential shortcomings. Other analysts agree that Bitcoin could provide the following benefits:
It will address long standing issues that have plagued the country since the adoption of the USD in 2001. Nearly 25% of the M2 money supply in El Salvador was minted in the last year, and the country struggles with inflation and devaluation of the dollar. This problem is exacerbated by an export based economy. Indeed, they buy the same goods for less money while taking care of an aging population. Bitcoin has the potential to free El Salvador from the economic woes of the United States.
Likewise, El Salvador does not boast as much GDP growth as many of its emerging neighbors and as much as 22% of the population remains below the poverty line. This results in a significant portion of the population living abroad and sending remittances home. At present these remittances represent an estimated 6% of the country’s annual GDP. Some analysts argue that the use of Bitcoin will ease the transfer of money and reduce the possibility of it being taxed.
Some analysts argue that the reliance on the USD has restricted El Salvadorians' access to financial services. A study revealed that economic conditions on the ground mean only 30% of the country has access to such services. Bitcoin, and cryptocurrency at large, places the creation of an alternative financial system at the foundation of its ideology. Indeed, the ubiquitous use of the dollar in El Salvador combines with comparatively low local costs to produce a cash based economy awash with small bills. This makes it hard for people to transfer, save, or invest in money. The acceptance of Bitcoin as legal tender promises to provide access to such services.
In a similar vein, Bitcoin is seen as an important way to generate liquidity in the El Salvadoran economy. It is also hoped that it will encourage investors and position the country as a regional innovator and tech hub. Indeed, the country will become part of a larger crypto ecosystem and be far ahead of the curb as an early adopter of technology.
A final benefit involved freeing El Salvador from its relationship with the US. This relationship has been controversial with El Salvador owing about US 19 billion to the United States.
How is Bitcoin being adopted on the ground?
A recent Vice documentary surveyed El Salvador’s attempts to start using Bitcoin. The government started with a beach town frequented by tourists. This location was an ideal choice for such an endeavor as it is frequented by people and surfers from the US. This means that the area has comparatively high smartphone usage and a tech savvy population. The initial result indicates that the policy has been a smashing success. People in the town claim that using Bitcoin makes it easier to save money and pay bills.
Using an app called Bitcoin Beach, they are able to easily make transactions. The documentary is also careful to emphasize that the USD is still accepted alongside Bitcoin, and therefore avoids excluding slow adopters from economic viability.
Indeed, this is the policy in general. Bitcoin will be slowly adopted and the government will introduce programs that educate its population on its use and distribute smartphones with Bitcoins wallet.
El Salvador is also adopting Bitcoin airdrop in its effort to distribute economic aid in the wake of the COVID-19 pandemic. Airdropping is a technique where cryptocurrency tokens are distributed to wallets. This technique was developed to attract followers, increase token disbursement, and generate interest. Bukele’s government is distributing 30 dollars worth of Bitcoin to every adult in the country in an attempt to encourage its adoption and stimulate economic growth.
The Opportunity Presented to Other Emerging Economies
El Salvador’s adoption of Bitcoin has vast implications for countries with emerging economies. Indeed, many of El Salvador’s neighbors are being presented with an alternative to relying on larger countries. This increases their autonomy and independence while ensuring the legitimacy of their governments.
Congruously, many Latin American and Caribbean countries have complicated histories and relationships with the US. Indeed, Washington has invaded some, embargoed others, and propped up dictators as well. Left-leaning countries in the region are particularly inclined to promote a move away from USD as it would enable them to endure possible economic retaliation while strengthening the economy.
El Salvador’s neighbor, Panama, is also presenting proposals related to crypto. Gabriel Silva, a controversial congressman has expressed his desire to make Panama a blockchain entrepreneurship hub.
Paraguay is another such example. Congressman Carlos Rejala is rumored to be submitting a similar bill within the month in a bid to attract crypto business in his landlocked country. Rejala seeks to establish Paraguay as a regional center for cryptocurrency. He believes that Paraguay’s low cost of electricity — 0.05$ a kilowatt-hour — will encourage a thriving mining industry. Similarly, as Paraguay utilizes hydroelectricity they can avoid much of the environmental damage accrued by mining cryptocurrency.
Some analysts posit that a single country adopting cryptocurrency will start a chain reaction that spreads to its neighbors. Indeed, any country with deep economic ties to El Salvador will need to accommodate the use of Bitcoin during trade.
What Other Opportunities Does This Present?
There are a myriad of opportunities presented by El Salvador’s adoption of Bitcoin. One notable example is the increasing demand for enterprise-level crypto/asset management. The majority of crypto services are tailored to individual users. Mass adoption of Bitcoin necessitates solutions tailored to companies. Several companies, including CYBAVO, are creating solutions that meet these needs. This Singapore based innovator has created a range of solutions which enable companies to manage multiple employee crypto accounts in a secure way. Their product, the CYBAVO Vault will prove useful as El Salvador moves forward.
It is still too early to see how El Salvador’s move to adopt Bitcoin plays out. Evidence suggests that it will bring certain advantages but it also faces some serious challenges. It will be neither Pandora’s box nor a silver bullet that ends the Central American country’s economic troubles. A careful assessment makes one thing certain — Bitcoin, and cryptocurrency in general, especially the new generation of decentralized finance-powering networks like Ethereum and Binance Smart Chain will continue to play an increasingly important role in international economics, and this role will affect everyone from street vendors to elected officials.