There has been a lot of talk on bitcoin being the white knight in shining armor coming to rescue the world from all the rot bedeviling the conventional fiat-based economy. Crypto has been praised as the silver bullet that will widen financial inclusion to bank the unbanked. Solve issues around good governance afflicting central governments around the globe, and give individual citizens more leeway in terms of privacy, security, and being their own ultimate authority.
However, the uptake of cryptocurrency has so far been on an individual level. We had not seen any nation take up cryptos as a national project. That was until the South American country, El Salvador, under President Nayib Bukele, made the bold move of giving bitcoin a legal tender.
Yes, El Salvador is the first (and still only) country in the world to give a cryptocurrency legal tender.
The Backdrop to El Salvador Legalizing Bitcoin
It is believed that President Bukele and elite members of the currently ruling Nuevas Ideas party owned crypto assets over several years. Bukele’s leaning towards crypto assets first became public in 2017 while serving as the mayor of San Salvador.
In the coastal village of El Zonte, the locals had been actively experimenting with using bitcoin in place of the fiat currency. Reports have it that some workers were even being paid in bitcoin. The locals also paid their utility bills, groceries, and small everyday purchases at the local shops using bitcoin.
In June 2021, while attending a bitcoin conference in Miami, President Bukele announced that he is backing a bill in his country that will give bitcoin legal tender. Bukele believed bitcoin would widen financial services to 70% of Salvadorans who were excluded from the only available conventional banking services by then. He further argued that the move would increase local investment from abroad since the cost of remittance into the country would drop drastically.
Come June 9, 2021, El Salvador legislators – in a vote of 62 versus 22 – passed the bill. It became a law on September 7, after publication in the country’s official government gazette notice.
Opinions Before Bitcoin Legalization
According to a poll run by a local newspaper, La Prensa Gráfica, between August 18 – 24, 2021:
- 65.7% of Salvadorans did not approve of the adoption of bitcoin as a legal currency
- 22% approved
- 11.5% declined from giving their opinion.
Some of the biggest concerns behind the dissenting voices were:
- The public simply did not have enough knowledge about cryptocurrency in general
- Those familiar with cryptocurrency argued that bitcoin’s value is unstable compared to the U.S. dollar (El Salvador’s only official currency before Sept. 7th)
- Bitcoin is the preferred currency for scammers and money launderers.
The follow-up question in the survey asked people if they would accept bitcoin as payment. The La Prensa Gráfica poll registered as follows:
- 72.2% said no, they would not accept bitcoin as payment
- 20.8% said yes
- 7% declined to give their opinion
The next follow-up question asked if they prefer El Salvador to use just one legal tender or multiple. 76.6% of the respondents said they prefer just one legal tender, and of these respondents, 78% said it should be just the U.S. dollar.
The Aftermath of El Salvador Bitcoin Legalization
The El Salvador government launched its bitcoin e-wallet, Chivo, and in the early hours of the day the new bitcoin law took effect, the system crashed. The excessive number of new users signing up for Chivo caused the crash. The traffic was beyond the ICT infrastructure supporting Chivo by then, and the system had to be taken offline.
By mid-day, the government had increased the server capacity and returned the system online. Come September 7th, the world’s bitcoin value dropped to US$46,000, its lowest of the month. That led to El Salvador experiencing a US$3 million paper loss. The Salvadoran government tried to remedy the situation by buying bitcoin, thus, effecting a price rise to above US$52,000.
That was followed by a public protest that saw about 1,000 Salvadorans camp outside the El Salvador Supreme Court. However, as days went by, more Salvadorans kept signing up for Chivo. A month later, El Salvador had more people with bitcoin wallets than those with bank accounts.
According to government reports, the Chivo app has more than three million downloads. Additionally, 46% of the country’s population is now banked, up from 29% recorded in 2017.
Although Salvadorans had the option of using any bitcoin wallet, the government-backed Chivo wallet has more incentives. For one, the Salvador government deposited US$30 into the Chivo wallets of all new sign-ups, and major gas stations were giving a 20% discount per gallon on payments made through Chivo.
One month on, reports show that through the Chivo app, a couple of millions of dollars have been remitted back into the country. Although just 12% of the local consumers have used bitcoin to make purchases, about 7% of companies have received payments in the crypto. Notable multinational brands already receiving payments in bitcoins include McDonald’s and Starbucks.
“I was very encouraged that this might take root much more quickly than anyone anticipated. I think El Salvador has bravely grabbed onto an opportunity to lead the world,” said Mike Peterson, a Director of the non-profit Bitcoin Beach.
There seems to be a unanimous agreement across the divide that bitcoin will reduce the cost of remittances. Salvadorans living abroad are said to remit about 20% of the country’s GDP annually. With the low cost of transaction fees on the blockchain platform, experts say the country could see savings of as much as $400 million per year, all from avoiding transaction fees charged by the traditional remittances channels like Western Union.
El Salvador Government’s Official Data
According to the El Salvador government’s official data, as of October 6th, over 2.25 million Salvadorans had downloaded the Chivo app. The app is processing about 65,437 transactions per second. Of the 200 ATMs supporting the Chivo exchange of bitcoin to US dollar across the country, just one was inactive. The data further shows that, on average, 100,000 people per day were signing up for Chivo.