By Brian McEachern
Staff Crypto Skeptic
There are a myriad of methods that a head of state can try and use to stimulate economic growth and increase foreign investment within a country. Twenty-first century problems require twenty-first century solutions, and El Salvador is experimenting with cryptocurrency as a means to address its economic woes. And by experimenting, I mean becoming the first nation to accept Bitcoin as legal tender. Along with the U.S. dollar, which has been El Salvador’s official currency since 2001, residents of El Salvador can now pay their taxes in Bitcoin. The policy became implemented on September 7th through The Bitcoin Law, which passed the Legislative Assembly of El Salvador 62-22 on June 9th. Since then, there have been some issues with its implementation.
Before the law or even the presidency of Nayib Bukele, a 40-year-old who won 53% of the vote in the 2019 presidential election, certain areas of El Salvador used the cryptocurrency before it became legal tender. El Zonte, a small town on the Pacific coast of El Salvador now primarily known for surfing and tourism, received $100,000 worth in Bitcoin from an anonymous American donor through NGOs in early 2019. Residents and businesses were encouraged to use Bitcoin. The increase in Bitcoin’s value and popularity have increased their wealth and converted their town into a hub for surfers and Bitcoin enthusiasts, now dubbed Bitcoin Beach. The current president, who has owned Bitcoin for several years, thought the town to be a model for inspiration and decided to implement their ideas on a national scale.
There are ways in which the use of Bitcoin as a legitimate currency helps address some of El Salvador’s problems regarding poverty. Approximately 70% of El Salvador’s citizens don’t have a bank account. Since September, the government claims that 2.1 million people have used Chivo, the government-backed crypto wallet; out of a population of 6.1 million, more people have a crypto wallet than access to a bank based on the government’s claims. Another issue that Bitcoin addresses are remittances in El Salvador, which compose 22% of the nation’s GDP. When immigrants from El Salvador send money back to their families, banks and other financial services charge fees that can be hefty for the service. Bukele hopes that since Bitcoin is a decentralized currency, remittances sent through Bitcoin will bypass these institutions and allow for more income for the families back in the country. The government also offered 30 dollars in Bitcoin for installing their Chivo wallet. While not sufficient enough to address the pervasive and often harsh poverty in the country, it does enable citizens to have more income at their disposal and further be able to stimulate the economy of El Salvador.
Intriguing in theory, the implementation of Bitcoin as legal tender has not been as smooth as crypto-enthusiasts and the young president would have liked. The day the Bitcoin Law passed, Bitcoin saw a drastic decline in value, decreasing from 52,000 to 44,000 U.S. dollars in four days. The drop resulted in a 3 million USD loss for the country. To remedy this, the government of El Salvador bought more Bitcoin, with the cryptocurrency returning to its value on the day the law took effect by early October. The policy also saw the value of the government’s bonds tank and resulted in the IMF canceling negotiations for a loan to assist the nation’s public finances that exceeded a billion dollars.
Another persistent problem for the government of El Salvador is their own crypto wallet Chivo. Despite more El Salvadorans allegedly having a Chivo wallet than a bank account, the Salvadoran Foundation for Economic and Social Development reported that only 12% of consumers used the cryptocurrency for commercial transactions. There has also been a multitude of complaints directed at the government for a variety of issues with the crypto wallet, including identity fraud, consistent problems with the wallet freezing and crashing, and withdrawals from Bitcoin ATMs, which El Salvador has 200 of throughout the country, in which your balance depletes but no money dispenses. Despite the bold claims about how many people downloaded Chivo, businesses have yet to see consistent consumer purchases with cryptocurrency. The same foundation polled 233 companies throughout El Salvador, where 93% reported they have yet to experience a purchase made with Bitcoin.
Even though the transition of Bitcoin becoming legal tender is slow and plagued with several problems, the government of El Salvador continues to double down on the policy. On October 27th, the government announced that they purchased 420 (I’m not lying, they actually did) more Bitcoin, which cost 25 million dollars. This is the most recent purchase of Bitcoin by the government of El Salvador after they purchased 150 Bitcoin on September 20th. Overall, the treasury of El Salvador reports that the government owns 1,120 Bitcoin, which is nearly worth 66 million dollars. As of October 1st, the government has invested approximately 200 million dollars on the project, consisting of 2.7% of the government’s 2021 budget, an amount three times larger than the budget for El Salvador’s agriculture ministry.
At the time this article is being written, the duration of El Salvador’s experiment with Bitcoin amounts to slightly less than two months. So far, it has produced disappointing results, but it is still too early to conclude that it’s a mistake. As someone who thinks all cryptocurrencies should be made illegal by every nation, a part of me hopes this experiment fails so no other country thinks it’s a good idea. At the same time, the Government of El Salvador has increasingly tied the economic health of the nation with the value of Bitcoin and the capability of its crypto wallet. The larger the implementation and reliance on this policy, the more susceptible the economy of El Salvador will be to the volatile fluctuations inherent in a cryptocurrency, which does not seem to be a concern for Nayib Bukele.