By Brynna Boyer
Last week, El Salvador became the first country in history to adopt Bitcoin as obligatory legal tender. Alongside the US Dollar, citizens can now use the controversial cryptocurrency to pay for anything- a haircut, groceries, a car, taxes, or even a house.
President Nayib Bukele introduced the measure to stimulate the stagnant Salvadoran economy. His administration claims that the adoption of Bitcoin will boost jobs and economic development by making El Salvador less reliant on the foreign US Dollar.
In order to entice Salvadorans to use the new currency, the government even gave $30 worth of free bitcoin to those who sign up for its national digital wallet, known as ‘Chivo’, Salvadoran slang for ‘cool’.
Another perk that the Bukele administration has introduced to bolster interest for the initiative is the promise that foreign investors who invest at least 3 bitcoins in the country- currently around $140,000- will be granted residency.
El Salvador is a country laden with debt, considered by the international community to be a failed state, and Bitcoin is notorious for being volatile. The economic conditions of El Salvador seem fundamentally unfavourable towards transitioning their economy to such a currency.
A cryptocurrency has never been implemented on a national level, never been used as legal tender, and never been relied upon to support a national economy. El Salvador plans to spend more than $225 million on the rollout, an astronomical sum to gamble on the hope that a cryptocurrency can sustain a country. How can a country so contrary to economic security be confident enough to embark on such a dubious scheme?
Populist president Bukele has an almost 90% approval rating. This exceptional sign of support gives him the confidence and the political means to transform El Salvador into his image- and a large part of the young President’s image includes the integration of Bitcoin.
According to Bukele, a quarter of Salvadoran GDP comes from remittances (money sent back to the country by people working abroad). As Bitcoin is an online currency, international transaction fees could be bypassed, allowing citizens to save $400 million every year.
Bukele claims it will also increase financial access to citizens. 70% of Salvadorans do not have a bank account as traditional financial institutions are generally inaccessible for low-income populations. With the introduction of Bitcoin, accessibility issues are solved, as banks are no longer needed to control the online cryptocurrency- or so the government claims.
The reality is most Salvadorans do not even know what Bitcoin is. A survey carried out in El Salvador in August found that 70% of citizens do not fully understand what Bitcoin is and 20% have never even heard of it before. In fact, only 4.8% of those surveyed were able to accurately identify Bitcoin as a cryptocurrency.
Bukele may hail Bitcoin as some sort of divine solution to his citizens’ issues of accessibility and poverty, but that is not the case. If most of the population does not have a full understanding of the new legal tender, of the currency with which they are now engaging, that currency is just as inaccessible as traditional banks.
Additionally, a study conducted in 2020 found that El Salvador has the second-lowest internet penetration in Latin America, with only 45% of Salvadorans having access to the internet. A currency which is solely accessible via the internet cannot fix issues of accessibility if it is still unavailable to more than half of the population.
Salvadorans also do not want Bitcoin as legal tender. Much of the population is distrustful of the cryptocurrency. In the weeks leading up to the implementation, hundreds of citizens have protested the mandate. Demonstrators included workers, veterans, and pensioners- voicing their concerns about the stability of cryptocurrency, especially if it was relied on to pay for pensions and welfare instead of the US dollar in the future.
There is a reason why Bitcoin has not yet been adopted by other countries: Bitcoin is an extremely volatile currency. Yes, set currencies do fluctuate with inflation and deflation, but they do so gradually at a relatively constant rate. The value of Bitcoin rises and falls at precipitous rates. In September 2020 it went from approximately $10,000 a coin to $63,000 in April 2021, but then plummeted to $30,000 a coin in July 2021.
Cryptocurrencies like Bitcoin trade entirely on sentiment, which account for its erratic valuation. Crypto enthusiasts like Bukele may want Bitcoin to succeed, thus leading to good sentiment and an increase in investment. But good sentiment alone cannot sustain a country when the chosen legal tender is the direct antithesis to stability.
El Salvador is a country with an already unstable economic infrastructure; therefore, it needs financial initiatives that promote security. It is extremely irresponsible of Bukele to base the economy of his country- and the lives of his citizens- on a trendy financial whim.
In solidarity with Bukele’s experiment, Bitcoin enthusiasts around the world each bought $30 worth of the digital coin. This has helped boost the value of the currency going into the experiment starting September.
However, as this show of solidarity was merely a one-off trend, the value of Bitcoin plummeted in the inaugural week of the measure. At the beginning of last week, the cryptocurrency was sitting at a promising value of $52,000 a coin until it plummeted to below $43,000 within just a few days: a turn of events which demonstrates the unreliability of cryptocurrency in stabilising a national economy.
Logistically, the rollout of Bitcoin has also been horrendously mismanaged and does not give people confidence in the competency of Bukele’s scheme. Within the first day, Chivo crashed. The government was forced to take the e-wallet offline for several hours as servers overloaded after tens of thousands of people tried to download the app.
This initial ineptitude in strategy seems to be anticipating further problems the Latin American country will face, should they continue the crypto scheme into the future. A state cannot gamble its financial security on fintech fads and the uninformed whims of an overly confident president.
The Salvadoran bitcoin experiment is certainly interesting, and the world is watching very closely. Success would mean an indisputable vindication for crypto-enthusiasts and a convenient stimulation to El Salvador’s economy. However, the volatility of bitcoin, the incompetence of management, and the lack of national support during the first week of the rollout paints a bleak picture should the use of the cryptocurrency endure.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
Image Source: Anadolu Agency