In the fast-moving world of cryptocurrency and blockchain technology, there are many new developments and dynamic changes. However, there has been one that has succeeded consistently in making the headlines and sparking a conversation about the scale of adoption of bitcoin, the most widely circulated cryptocurrency, and the future of decentralized finance. The case in reference is El Salvador’s acceptance of bitcoin as legal tender for all payments within the country, making it the first country to ever do so.
This decision made by the president of El Salvador, Nayib Bukele, has been registered as a monumental event in the history of cryptocurrency. While it is a globally celebrated landmark by crypto enthusiasts, there has not yet been a homogenous acceptance of it by the domestic public of the country. This move invites more questions than answers and leaves much to unpack. The many points of investigation range from – the political rationale driving this decision and economic stability to the result of the interaction of a decentralized system with a centralized one.
Image Credits: California News Time
El Salvador’s Monetary Policy
El Salvador’s national currency, the colón, had historically failed to deliver economic stability in the country causing the inflation rates to soar over 10% between 1977 and 1995. The deteriorating conditions prompted the Salvadorian government to radically alter the monetary and financial policy. To reform the system and secure long-term fiscal benefits, a unilateral decision to ‘dollarize’ the economy was made. By means of this, the US Dollar would be used for all commercial and financial transactions. While the advantage of adoption of the dollar as legal tender materialized in low inflation, fixed exchange rates, and macroeconomic stability, it vanquished El Salvador’s monetary independence.
The political economy of El Salvador is idiosyncratic. By substituting their centralized local currency with that of the US Dollar, El Salvador lost the ability to recalibrate monetary policies in response to local economic conditions – a reality that has consistently plagued their financial management and corroded their autonomy. As a result of these factors, El Salvador’s move to introduce bitcoin as legal tender in tandem with the US Dollar can be understood as a way of reclaiming sovereignty, in some part, over its monetary policy. In other words, the use of bitcoin is aimed to dilute the potency of the American dollar circulation in the El Salvadorian economy, which would in turn reduce their dependence on the United States as a financial partner. This plan is an attempt to de-dollarize their economic transactions.
Nayib Bukele’s Vision
The bitcoin-fueled monetary policy has been envisaged, by Bukele’s administration, to pull El Salvador out of its economic troubles. Further, the populist leader claims that the use of cryptocurrencies will bolster financial inclusion by giving unbanked people access to financial services. This move has also been ignited by the scandalously high transaction cost of cross-border payment for migrants’ remittances, a major source of economic sustenance for the citizens of the country – 22% of the Salvadorian GDP. Bukele purports that the use of bitcoin will facilitate transfers of remittance and considerably reduce transaction costs which would save the country up to 16 billion dollars per year.
Such a decision will have an impact not just on the murky Salvadorian economics but also on its global perception. Nayib Bukele has structured this opportunity to rebrand the image of El Salvador, from a country known for its violence and fragmented economy, to a citadel for modern innovation and crypto pioneering. This, by extension, means inviting opportunities within the country and creating a Salvadorian Dream. It is aimed at changing the narrative about El Salvador and positioning it as a forward-thinking country with a visionary leader. The President claims that if 1% of the world’s Bitcoin were invested in El Salvador, it would raise GDP by 25%. To draw crypto entrepreneurs, spur innovation in the country and materialize this possibility, he has offered permanent residency to anyone who spends three Bitcoin. Lastly, Bukele wishes to consolidate his power and nurture the image of a relatable, cool, millennial President by adventuring with Bitcoin which is widely considered the currency of the future.
Recognizing Bitcoin As A Legal Tender – What It Entails?
Bitcoin can be used for all commercial and economic transactions in El Salvador. All prices can be expressed in bitcoin and the law states that "any economic agent must accept bitcoin as a form of payment when it is offered by the person who acquires a good or service." That is to say, any goods or services previously payable in dollars can now be paid in bitcoin. To sweeten the deal, bitcoin’s elevation to the status of legal tender rather than an investment asset would mean that no capital gains tax would have to be paid by an investor, should its value increase.
The Bitcoin Law, which came into force on 7th September 2021, makes taxes payable in Bitcoin, lowers commission fees, obliges all businesses to accept it, and paves the way for the government to disburse subsidies in it. To jumpstart the Bitcoin economy, the government has built the necessary infrastructure through a network of 200 Bitcoin ATMs and a digital Bitcoin wallet called Chivo. This Chivo app, named after the Salvadorian world for ‘cool’, offers a one-off incentive equivalent to $30 worth of Bitcoin from the government to those citizens that participate in this new economic experiment.
How Are Salvadorians Responding?
Salvadorian President Nayib Bukele claims in a country of 6 million people, over 2.1 million citizens have used the Chivo wallet thus far. At face value, these numbers suggest a raging success, however, is it dissonant with the reality in the country. The opinion polls indicate that 7 in 10 Salvadorians do not want to be forced to accept Bitcoin. Having been part of an economy that largely runs on physical cash, most citizens are unsure how this project would unfold; their perception is laced with fear and apprehension. They seem to be well versed the volatility of cryptocurrency, its potency for corruption and fear that it could exacerbate the inflation levels within the impoverished Latin American country. On 15th September, just days after the Bitcoin Law was passed, around 15,000 protestors took to the streets to demonstrate against Bitcoin. Many expressed their disapproval by attacking the Chivo cash machines instituted to facilitate transactions, with at least one of them being set on fire. This imposition is widely considered dictatorial and remains a reality that many sceptics resist.
Failures In the System
Given that bitcoin was originally created to be a form of value transaction outside of government control, using it as a government-endorsed currency hint at some very obvious problems. Cryptocurrency has a serious money-laundering problem, the price of bitcoin is incredibly volatile, and cryptocurrencies remain difficult to use. Bukele’s currency experiment, which is criticized as him playing Russian roulette with public money, has set off to a rocky start. This system which has been deployed from scratch at a national scale with no testing, shock absorption, or mechanism for insulation has naturally failed to secure the peoples’ trust. Many acknowledge that they do not understand the workings of this system and face difficulty in adapting, which when complemented with the lack of necessary education programs makes the transition harder for them.
Despite a sizable number of Bitcoin ATMs having been installed across the country, they do not work optimally. Adding to the infrastructural problems, the Chivo wallet’s identification system is faulty and is riddled with technical glitches. This dysfunctional system has caused multiple transactions to fail, and customer service lines to be jammed – leaving the users with no recourse. Spotty internet connections, low data bandwidth, and insufficient government initiatives to strengthen these networks further add to their problems. Bukele’s logic of attracting international investment through the adoption of Bitcoin has complicated its relationship with the International Monetary Fund (IMF). Due to concerns over transparency and environmental cost, the Fund has denied El Salvador’s request for a billion dollars to assist in its Bitcoin rollout.
Further, the value instability of bitcoin coupled with the 10% drop in value in the day following its adoption have confirmed the fate predicted by many skeptics and accentuated the collective resistance. Thus, it can be claimed that Bitcoin is costing the country dearly.
Conclusion
The introduction of bitcoin as legal tender in El Salvador is not just a financial shift but also prompts a reconceptualization of the systems of trust and transfer of value. This system has arguably failed to resonate with the interests of its citizens. The lack of a piecemeal approach and sufficient educational initiatives along with underwhelming infrastructure has amounted to an uncomfortable transition process in El Salvador. While Nayib Bukele has some lofty ideas about the benefits of such a shift, its implementation has been botched.
It has been argued that this initial period of flux is naturally accompanied by the process of change, and cannot be considered as an exhaustive sample to truly assess its implications. Bukele does flag an important issue of costly cross-border payment mechanisms and their impact on the economic growth of developing countries. It highlights the need for critical reform – but the use of cryptocurrency to fill the void may not be the best way to move forward.
It is premature to conclude the nature of this decision or evaluate its long-term ramifications. Could this be wishful thinking on the part of El Salvador, or could this shift make it a significant monetary center? Would this fragment their financial system, or could it make it the harbinger of global technological transformation? There are no clear answers, but one thing is for sure – Nayib Bukele’s decision could serve as an inflection point for the future of cryptocurrencies.
About the Author
Khushi Baldota is a final year student at the Jindal School of International Affairs. Her interests include security studies, public policy and political economy. She can be reached at: khushiibaldota@gmail.com