Last June President Nayib Bukele of El Salvador announced that Bitcoin was approved as legal tender in his country. This was an extraordinary measure for the country, perhaps inspired by success from the prior year when one of the country's villages had already de-facto accepted it as a currency. The price of Bitcoin at the time of Bukele's decree was around $35,000.
Since El Salvador's move, a few things have changed, and unfortunately, so far it has been a rocky road, with multiple hurdles:
Domestically, it was not any easier for Bukele. The transition towards the abundant usage of crypto-wallets by the public was clearly going to be complicated. Right from the start, multiple street protests erupted against this move. Later on, the official digital wallet launched by the government, El-Chivo, suffered multiple technical issues and exploits, which resulted in mass identity thefts and hacks. Perhaps critics of El-Salvador's move had a good point in criticizing the government on the technical deployment of the wallet. It seemed that this product was not ready for launch at such short notice and now the hope is that the government will do all it can to restore the people's trust and provide them with a decent solution.
Domestic issues aside however, there is a more significant problem - Bitcoin price has collapsed. As of writing this post the price of Bitcoin is ~$38,000, rallying off its near term lows but still significantly lower than its peak in November 2021. The overall sentiment in global capital markets is negative, as inflation has increased and COVID is still not going anywhere. Since Bitcoin is such a volatile asset, it is only reasonable that an economy that accepts it as a legal tender will suffer gravely when it depreciates so drastically. As a direct result El-Salvador's debt increased and its credit rating was downgraded to Caa1 by Moody's.
Even before the price drop, the response from the international community was highly critical, with multiple countries and institutions opposing the move. In response to El-Salvardor's request for a $1.3 Billion loan, the IMF urged it to stop using Bitcoin as a legal tender. All eyes have been watching this country, some perhaps with the potential in mind to make the same move. The near term volatility will probably dampen those desires.
Was it worth the risk? Let's take a moment to remember the reasons behind Bukele's insistence on moving to Bitcoin. In his Twitter thread of the proposed announcement, Bukele suggested this move could assist in cutting the significant expense of intermediary fees and addressing the country's severe unbanked problem (70% of its population). His plan and hope was to dramatically improve the lives of millions in El Salvador.
According to the IMF's latest report, El Salvador's GDP per capita ranks 114th in the world. It struggles with poverty, inequality and gang-related violent crime. Its economy relies heavily on remittances - around 20% of GDP, which ranks as the 6th most remittance dependent country. It is very interesting to note that since 2001 El Salvador's currency has been the US Dollar, replacing the Colon. The motive behind this measure was the stabilization of the economy and the facilitation of trade with the United States. However the move involved sacrificing a major aspect of its sovereignty. El Salvador cannot print US Dollars, which means that it does not control its currency, hence its monetary liberty is severely limited and its economic dependence is intensified.
At the time, President Bukele suggested two powerful arguments to support his plan. The first was the egregious fees involved in remittances. A recent World Bank report found that the global average remittance intermediary fee is 6.38%. Perhaps many readers would agree that this fee may be among the most wrongful financial exploits that exist today. Foreign workers are often legally taken advantage of, due to the lack of financial options that they are facing. Using cryptocurrencies could eliminate remittance fees to a fraction of cent, instead of dozens of dollars. This could have an immediate and long lasting effect on the lives of the recipients, and on the senders, who would now be able to save more of their own money instead of spending it on a third party transfer. Add to that the convenience of sending the funds to your relative's mobile device instead of to a local agent exchange where she might get robbed or attacked, as is sadly a common occurrence when dealing with cash. Though it is clear that this process will not happen overnight, the potential value-add to the lives of foreign employees should provide enough incentives for employers to eventually transition into paying with crypto. Furthermore, the vast majority of El Salvador's population is unbanked, therefore the transition may hopefully involve financial inclusion, as I have written before about the social impact of DeFi, and specifically stablecoins.
Naturally the transition to a crypto-based economy, even to a partial extent has had issues and obstacles. On a global level we see that the unbanked are willing and eager to adopt new technologies that enable them financial savings, but the technical transition is still and will be challenging. By "technical" I mean migrating one's financial activity to a crypto wallet and grasping the concept that she is now fully in charge of her assets, with no third party who can assist in case of fraud, mistake or any other type of problem. This challenge should not be disregarded.
El-Salvador's economy could face difficult times in the near future. Critics of Bukele's move to adopt Bitcoin as legal tender might have forgotten the dire situation in which it had been beforehand. The government is facing tremendous pressure, both domestic and international, to rethink its policy. It will take great efforts, primarily gaining the people's support and attracting blockchain-related entrepreneurs, along with exogenous effects such as positive market trends, to change the overall momentum. Let's hope for the people of El-Salvador that their president and government can pull it off. I am rooting for them.