Bitcoin in El Salvador

By: Anthony Gizzi

Upon their creation, the goal of cryptocurrencies such as Bitcoin, Doge, and Ethereum was to create a decentralized payment system that was not backed by a government or financial institution. Payment in cryptocurrency could be used internationally without issue. Millions of individuals worldwide have invested their hard-earned money in these alternative forms of currency. Publicly traded companies such as Tesla and Hilton were acceptors of Bitcoin currency as many thought that cryptocurrencies were the way of the future. The vision was that Bitcoin and Doge would replace physical currency such as the greenback. This ideology is still widely popular around the world. In fact, the nation of El Salvador has adopted Bitcoin as legal tender for all transactions. The country has suffered through mass adversities since the adoption of cryptocurrency.

El Salvador is a densely populated Central American country with a population of approximately 6.5 million people. The country is modest when it comes to economic growth. The annual GDP growth rate has only surpassed 3 percent twice in the past 20 years. Poverty has not been a topic of discussion for El Salvador in the last number of years. However, with a global pandemic ravaging numerous world countries including El Salvador, poverty is a given. The rate of poverty increased by an astonishing 5.9 percent in one year. From a social perspective, El Salvador has one of the highest crime and murder rates per capita in the world. Although consistently decreasing, the murder rate in the country is still 51 per 100,000 people. So why would a country with such a volatile economy and standard of living want to adopt a decentralized system of payment in Bitcoin?

It is widely known that Bitcoin and other forms of cryptocurrencies are utilized in money-laundering situations. President Nayib Bukele declared that Bitcoin would be a national currency in law on June 5, 2021. The law would go into effect approximately three months after its passage. Organizations such as the World Bank and the International Monetary Fund could not understand the decision by Bukele. Typically, to create a trusted currency in a nation, years of testing and case studies would be required. Different financial situations such as recession and inflation would need to be taken into account and studied from the perspective of Bitcoin being instituted over the United States Dollar. Price fluctuations in Bitcoin would also need to be taken into account, as prices of the currency can be quite volatile. In addition to the law instituting Bitcoin as a legal currency, Bukele also introduced a Bitcoin wallet application known as Chivo. Chivo would be the basis for Bitcoin-related transactions in the country. For Chivo to work effectively, a stable form of broadband internet would be essential. El Salvador does not have this infrastructure to the extent that it is needed. In addition, the Salvadoran government is making the assumption that all of its citizens have cellular devices and computers to keep up with a Bitcoin boom. The Bitcoin law states that all firms and businesses must accept Bitcoin as a form of payment. This section of the law paired with the previous observation about lack of internet access equates to a recipe for disaster. The country’s citizens are taking to the streets in opposition to the forced institution of Bitcoin. President Bukele, a once-popular President, is now the most hated man in the country. With El Salvador’s location right in the middle of Central America, economic opportunity is quite high. The institution of Bitcoin has the potential to ruin El Salvador’s economic future. Will nations looking to trade goods and services trust El Salvador after this drastic economic change? The answer is unknown to us now. Future financial transactions and statistics will tell the story.

Gerard, D. (2021, September 17). El Salvador's Bitcoin Law is a farce. Foreign Policy. Retrieved October 25, 2021, from https://foreignpolicy.com/2021/09/17/el-salvador-bitcoin-law-farce/.

The World Bank Group . (n.d.). Overview. World Bank. Retrieved October 25, 2021, from https://www.worldbank.org/en/country/elsalvador/overview#1.