Bitcoin and Political Turmoil in El Salvador
At the Bitcoin Conference in Miami last June, El Salvador President Nayib Bukele announced that his country would become the first to adopt the cryptocurrency as a legal tender. Days later, Bukele’s government approved the Bitcoin Law to come into effect on September 7th. Salvadoran businesses are now required to accept payments in the country’s two official currencies: Bitcoin and the U.S Dollar. This represents a milestone for cryptocurrencies, as they become more widely adopted and more countries are bound to integrate them into their monetary systems. Cuba, for instance, announced in August that it also recognizes cryptocurrencies and will take steps to regulate them. More than a month and a half after the adoption of Bitcoin as a legal tender, the world turns to El Salvador to examine the short-run effects of this revolutionary decision.
The reasons for President Bukele’s adoption of Bitcoin as an official currency stem from multiple economic and social factors in El Salvador. For example, the adoption of Bitcoin is meant to address the problem of the country’s unbanked population. Seventy-one percent of Salvadorans do not possess a personal bank account, making it difficult for them to save and accumulate wealth. Another goal is to reduce the fees on remittances. Salvadorans around the world send money back to their families, representing close to a quarter of the country’s total GDP. Bukele estimates that Bitcoin could save Salvadorans up to 400 million in banking fees annually on remittances alone. Finally, Bukele wants to rebrand El Salvador and change its image from a country primarily known for gang violence to a forward-looking, innovative country revolutionizing the monetary world.
Along with a Venezuelan team, the government developed an app, Chivo, as the government’s official wallet. Through a framework similar to PayPal, the app provides a secure payment system, as well as a place to store money in the form of Bitcoins and USD. Users can exchange between the country’s two official currencies without fees. The government also set up 200 Chivo machines across the country, to serve as bitcoin ATMs, as well as some in the US to make it easier for Salvadorans abroad to send remittances.
Despite the government’s best efforts however, the Bitcoin Law is off to a rocky start. On the morning of September 7th, three hours after the law came into effect, Chivo was shut down for a few hours to correct an issue and increase server capacity. Compounding the situation, Bitcoin dropped $10,000 in value a day after El Salvador purchased 400 coins, roughly 20 million USD, most likely due to an SEC warning issued on U.S cryptocurrency exchange Coinbase. Moreover, Chivo machines around the country ran out of money. Salvadorans who download the app and sign up to Chivo will each receive a $30 sign-up bonus, equivalent to about 3-days worth of wages in the country.
Nonetheless, a month and a half into the Bitcoin Law, things seem to be gaining momentum for El Salvador. Bukele wrote in a tweet in late September that 3.5 million Salvadorans had already downloaded the app, with 2.1 million actively using it. Counting Chivo alone, this means more Salvadorans now have more crypto wallets than bank accounts. Bukele also tweeted in early October that more Salvadorans were inserting money in the wallet to buy bitcoins than were withdrawing them from the ATMs and that remittances had increased. The government has planned different initiatives to ensure Bitcoin becomes an integral part of Salvadoran life, like offering discounts on gas for customers who pay using Bitcoin, or unveiling a new national airline, the first airline to accept payment in Bitcoin.
Though certain communities have been using the cryptocurrency since as early as 2019 (as in El Zonte’s Bitcoin Beach), it remains unfamiliar to most of the population. Nevertheless, the Salvadoran government has high hopes for Bitcoin and opted for a strategy of radical implementation. As one government figure explained: “We can do this slowly, or we can just put it on the people and people will learn. If they’re forced to do it, they’ll learn and they’ll learn quickly.” El Salvador is trying their own version of the Silicon Valley method, aiming for rapid, widespread adoption.
Bukele’s presidency as a whole has been marked by drastic reforms like Bitcoin, which he has been imposing on the country. In May of last year, he fired five supreme court justices along with the country’s attorney general to replace them with some of his allies after they denounced his corruption and abuse of power. Vice President of the United States Kamala Harris has been very critical of this action, calling it “the deepening of an alarming trend towards the concentration of power.” This did not seem to shake the Salvadoran President however, who asserted he was simply “cleaning house.”
A few days before the Bitcoin Law came into effect, El Salvador’s supreme court, including Bukele’s newly appointed judges, ruled that he may be eligible to seek reelection at the end of his term. Historically, Salvadoran presidents could not run for a second consecutive term, but the importance of the ruling was far overshadowed by the country’s new legal tender. The situation is growing increasingly bleak for El Salvador’s democracy, with Human Rights Watch calling out Bukele for dismantling democratic institutions faster than former Venezuelan dictator Hugo Chavez.
Despite protests, sanctions, and corruption, El Salvador’s young President enjoys a high approval rating. This may explain why Bukele shows little concern for his global image: he even called himself “the world’s coolest dictator” on Twitter, taunting the international press. However, many Salvadorans have been speaking out against his recent actions. Weeks ago, more than 4,000 protestors marched in the nation’s capital denouncing the Bitcoin Law along with his attacks on the country’s democracy, indicating a possible shift in Bukele’s popularity.
El Salvador will soon face another test as it courts a loan agreement from the International Monetary Fund. The country’s central bank president Douglas Rodriguez suggested in an interview that he does not expect Bitcoin to jeopardize the deal, as they have made clear to the IMF that Bitcoin and Chivo represent a legitimate payment method, not a speculative asset. The IMF’s most recent report expressed concern over the adoption of Bitcoin but did not condemn it. Rather, it made a handful of suggestions such as increasing the regulations surrounding Chivo to safeguard consumers against potential hazards, and warned El Salvador against the cryptocurrency’s volatility. This implicit acceptance of the IMF towards the adoption of Bitcoin as legal tender may revolutionize the acceptance of cryptocurrencies in national economies as more than just the newest finance fad. Depending on the results from El Salvador’s novel experiment, more countries may consider Bitcoin as a viable option for legal tender.