El Salvador’s introduction of Bitcoin as a legal tender early in September 2021 has been disastrous on many levels. President Nayib Bukele had hoped that an influx of Bitcoin, particularly from foreigners, would help Salvadorans save $400 million in commissions for remittances, which comprise a fifth of El Salvador’s GDP each year.
However, irrespective of any setbacks, El Salvador is indisputably the holder of a first: it is now the first country in the world to adopt a cryptocurrency as a legal tender. The legislation brings the country’s official currencies to two, as Bitcoin joins the US dollar, already legal tender.
Bukele is either a remarkable visionary or a dangerous fantasist. On the one hand, he is an advocate for using electricity generated from volcanoes to mine bitcoin. But some fear he may be plunging his country deep into a quagmire from which it might take decades to return. How the future will judge him remains to be seen.
No matter what you think of him, President Bekele’s heart belongs to his country. Speaking to the Legislative Assembly this past August, the President said, “We must break the paradigms of our past. It is El Salvador’s fundamental right to strive to become a first-world nation.”
Bekele also revealed that El Salvador’s government already owns 550 bitcoin, which is approximately US $36.4 million at the time of writing.
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Salvadorans Were Eager to Try Out Bitcoin
El Salvador’s official Bitcoin wallet is called Chivo, Salvadoran slang for ‘cool,’ and in the first few hours following its birth, Chivo lived up to its name.
Man-on-the-street and ordinary Salvadoran Aaron van Wirdum soon after went online and tweeted, “I’ve walked into a McDonald’s in San Salvador. I really wanted to see if they would allow me to pay for my breakfast in Bitcoin… guess what? They did! They printed a ticket that had a QR code on it. The code took me to an invoice webpage, and I’m now enjoying my favorite breakfast.”
What the President saw as the “overwhelming success” of Chivo may have been an overly optimistic interpretation of events. Bekele’s $30 sweetener, designed to entice Salvadorans to try the new currency, might have been too attractive. In a country where the national annual income in 2019 was just $3,650, few would sniff at $30.
The urge to get this free handout was so feverish in the poverty-stricken country that only hours after going online, the government of El Salvador had to remove the Chivo from its network after being unable to handle the exploding number of user registrations. Inevitably, the rollout ran headfirst into a welter of problems.
What Went Wrong?
Multiple factors came into play that hindered Chivo’s rollout.
The Rollout Ran Into Technical Issues Almost Instantly
Just after midnight on the 7th of September 2021, Bukele complained that Chivo wasn’t available on important internet platforms like Huawei and Apple. Using Twitter, Bukele asked online stores to stock Chivo. Later that morning, Huawei made it available, but this only increased the drain on computing resources.
Hampered by insufficient computing power to meet demand, the government could not prevent technical glitches from blocking people who were anxious to sign up for the Chivo app or withdraw money from ATMs. The upshot was that many people did not receive the promised $30 bonus, fuelling disappointment, anxiety, and dark suspicion.
Cryptocurrency Is Naturally Volatile
Bitcoin’s instability became apparent shortly after the launch of Chivo: the cryptocurrency fell $10,000 in just three minutes.
The government was forced to buy additional Bitcoin to support the currency’s fluctuating price. The cost was reportedly worth approximately US $7 million.
Many in San Salvador Protested the Rollout
Even on the morning of the rollout, over 1,000 protestors demonstrated against the cryptocurrency’s implementation at the country’s capital in San Salvador.
Recent polling by the Universidad Centroamericana Jose Simeon Canas found that a staggering majority of Salvadorans — almost 68% of them — disagreed with making Bitcoin legal tender. The same poll revealed that many respondents didn’t know how cryptocurrency worked.
Putting The Horse Before The Cart
El Salvador is a country where half of the population lacks internet access and the rest only have limited connectivity. It will be tough for many Salvadorans — even the willing — to obtain the technology to use cryptocurrency.
For example, Jose Herrera, a sweets seller, said that he would continue to suffer with or without Bitcoin since he could not afford the cost of operating a mobile phone for all but his most basic needs.
The Problems With Crypto as Legal Tender
There is some irony in seeing a government adopt a currency explicitly designed to bypass governmental oversight and control. There are many obvious problems with using Bitcoin as a government-endorsed cryptocurrency.
- Cryptocurrencies have a staggering money-laundering problem.
- The price of Bitcoin, like all cryptocurrencies, remains incredibly volatile as well as challenging to use for everyday purchases.
- Bitcoin transactions are irreversible.
Victims of fraud, in all likelihood, will remain defrauded as every cryptocurrency theft is final. There’s no such thing as customer service when it comes to Bitcoin, so there’s no form of complaint resolution, regardless of cause.
Summary: Bitcoin’s Future in El Salvador
It’s unclear at the moment how El Salvador’s experiment will turn out in the long run. For now, it looks like the country and its popular President are pressing ahead with the Bitcoin project despite technical glitches, protests, and the inherent volatility of cryptocurrencies. All the citizens can do is strap in and get ready to rumble.
