El Salvador made history last week by becoming the first country in the world to adopt Bitcoin as legal tender. The landmark move had a rocky beginning, however, with a 15% crash in the Bitcoin market hours after launch, technical problems plaguing the country’s digital wallets and widespread demonstrations against the government — and the adoption — all taking place within a week.
According to local media reports, the government’s new Bitcoin wallet “Chivo” has just crossed over 500,000 users, after it was removed from app stores and halting new registrations as technical glitches were addressed. Not bad for a country of only 6.5 million people, but a US$30 airdrop of Bitcoin users received just for signing up for the wallet surely helped give its numbers a shot in the arm.
There are 200 Chivo ATMs across the country to make quick transfers between Bitcoin and the existing fiat currency, the U.S. dollar, as smooth as possible, with a further 50 Chivo-supported ATMs in the U.S. to service the country’s extensive expatriate population. Larger businesses within the country have already begun accepting Bitcoin, as McDonald’s El Salvador became the first national franchise of the fast-food giant to do so. Customers are provided a QR code with their receipts linking to a website to pay the invoice for their food, just as they can in a growing number of locations across the country.
For an outside observer, it might look like the adoption is going smoothly and seeing significant uptake across the country. But that just simply is not the case, says Alex Shipp, chief strategy officer of private decentralized finance platform Offshift. Fluent in Spanish, Shipp was in El Salvador during the week of the adoption and found that outside of a very particular spot in the country, there is hardly any uptake at all.
“That’s what really surprised me, too,” he said, “because if you go on crypto Twitter, you’ll get a totally different vibe.”
Shipp found that most of the Bitcoin adoption in the country is occurring in the small coastal town of El Zonte — or, as it’s known to many in the crypto industry, Bitcoin Beach. In 2019, an international group of Bitcoin evangelists moved to El Zonte, a town of only 3,000 people without a bank, and began a widespread experiment to run as much of the town as possible on Bitcoin. Workers receive salaries and pay bills in Bitcoin, and tourists can spend their cryptocurrency in the town.
El Zonte even had its own Bitcoin wallet — the aptly named Bitcoin Beach Wallet. But go roughly 30 kilometers into San Salvador, the nation’s capital, and it is a very different story.
“There’s no one in San Salvador that uses Bitcoin,” he said. “There’s no businesses there that are accepting purchases in Bitcoin, even on the seventh or eighth [of September, the day of and after adoption].”
Broadly unpopular
Wednesday marked El Salvador’s bicentennial, and alongside celebrating 200 years of Central American independence from Spanish rule, the streets of San Salvador were also marked by widespread protests against government corruption and mismanagement. Key among the issues under protest was the country’s Bitcoin adoption.
Some protestors wore anti-Bitcoin shirts or waved signs against the move as some of the Chivo ATMs in the city were vandalized, and the cubicles housing them were set on fire.
While Wednesday’s demonstrations were a part of a broader protest movement against the government, these were not the first public protests against the adoption since President Nayib Bukele first announced the plan at Bitcoin 2021 in Miami in June. Critics argued the plan was rushed through with little oversight by Bukele’s party, which holds a significant majority in the country’s National Assembly. A poll conducted within the country shortly after the bill was passed showed less than 20% of respondents approved of the plan, while 46% of respondents knew “nothing” about Bitcoin.
Central to the protestors’ concerns was a sense of creeping authoritarianism in the country, as one protestor — and former Supreme Court justice — Sidney Blanco was quoted by the Associated Press as saying, “The time has come to defend democracy … This march is symbolic, it represents weariness with so many violations of the Constitution.”
This dissatisfaction is central to the backlash against a government that only two decades ago switched from its local currency to the U.S. dollar. Locals resented having their own currency taken away from them, says Shipp, who is also concerned about the autonomy of a government-backed wallet, calling centrally controlled Bitcoin adoption a “wild oxymoron.”
“It’s a huge red flag,” Shipp says. “Because the fact that one central entity, a government of all entities, has the ability to shut down individual wallet applications, individual users or all of them at once, that it can close down the on-off ramp so that people can’t go back and forth between Bitcoin and dollars is totally antithetical to what this movement [Bitcoin] was supposed to be about in the first place.”
Where else?
Ostensibly, Bukele undertook this move to help address some of the economic issues the developing nation is experiencing. In 2019, US$6 billion, or 20% of the country’s entire GDP, was made up of remittances — one of the highest levels in the world. In marketing the plan to the country, Bukele highlighted that with such a reliance on remittances, a huge percentage of the country’s potential GDP is lost to foreign intermediaries.
Currently, 70% of El Salvadorans remain unbanked, and crypto has long been heralded by some as a way to increase financial inclusion of the unbanked by lowering the barriers to entry and ongoing costs.
With these benefits in mind, other countries in similar economic situations may be looking to El Salvador to see how this experiment plays out. In June, a Paraguay legislator announced plans to make Bitcoin more viable in the country. Last month, Cuba said it will begin to recognize and regulate crypto for payments and Uruguay introduced a bill to do the same. Staying in the region, Panama recently announced plans to grant digital assets legal status in the country.
El Salvador’s adoption of the U.S. dollar has also meant the country has less sovereignty over its own monetary policy, an issue shared by other developing countries around the world as well, including the Philippines and Cambodia — the latter running a dual currency system since 1993. Industry experts say this is another reason why a developing economy may look to follow El Salvador’s suit, to regain further monetary independence.
“Bitcoin has the power not just to bring financial empowerment to communities that are otherwise excluded from global financial access,” says Jeff Yew, CEO of Monochrome, Australia’s first fund to offer institutional-grade exposure to Bitcoin. “It is also the ability for countries that are heavily dollarized to have a way to survive without relying too much on, say, the U.S. dollar.”
Despite his concerns for the implementation, Shipp agrees with Bukele’s assessment that Bitcoin does have the ability to address these concerns of lowering remittance costs and increasing financial inclusion. But he finds the top-down approach is antithetical to what Bitcoin was created for, and what the existing Bitcoin community in the country has been working to build.
More needs to be done to increase the awareness of Bitcoin in the country, to give people the tools to understand its ethos and underlying technology, Shipp says.
“Then you can have a transformative cultural shift,” Shipp says, “where people are in general not only interested in adopting Bitcoin, but can take the time to explore wallet applications [and] determine how they’re saving and storing their wealth. Then I think there is potential for something really powerful to happen, and that can be a precedent for other countries and other peoples as well.”
The market
Bitcoin’s critics often highlight the extreme volatility of the world’s largest cryptocurrency, which it demonstrated with uncanny timing last week, crashing roughly 15% — along with the rest of the market — the day the adoption came into place. After trading above US$52,000 for most of Tuesday, Bitcoin fell to around US$45,000 in a matter of hours. While President Bukele made the most of the moment to announce he was buying the dip, some experts argued the excitement for the adoption was already priced in, and the sell-off was to be expected after the big news.
Yew is unconvinced, however: “The price pullback is unrelated to events of El Salvador just because that Bitcoin is such a global market today,” he said, arguing with a GDP of US$27 billion — just 4% of Bitcoin’s market cap — El Salvador is likely too small to have had that much of an impact. Responding to such criticisms of volatility, Yew said it is to be expected
“[Bitcoin] is known to be volatile,” he said. “It is, after all, a nascent free, market-driven asset class that is going through what we call a price discovery process … There’s no precedence. Because something that has no precedent in the past to draw on, one can only connect the dots looking back. Which is why some portfolio allocators and corporate treasurers embrace Bitcoin and some dread it.”