Will El Salvador become a crypto sanctuary or a cautionary tale?

Using bitcoin to purchase food, a haircut and even the daily newspaper is now an option for 6.5 million people in El Salvador, after the small Central American nation became the first in the world to officially adopt the cryptocurrency on September 7.

The adoption push has been met with a spectrum of emotion ranging from excitement, confusion to opposition.

“For many of us, it’s a dream come true,” Roman Martinez, a community leader in the small coastal town of El Zonte, told TRT World. 

“Before we used to hear about technological developments happening in Europe and the US. Now, history is being made in El Salvador.”

However, some locals still don’t know how the cryptocurrency works nor how they’ll be able to use it.

Miguel, who asked not to reveal his full name, works in a hardware store in San Salvador and said the business has not yet made plans to receive payments in bitcoin.

“There is not enough information about how bitcoin will work in the country,” Miguel told TRT World, adding that he understands the law necessitates businesses to use the app, even though the authorities previously stated it would not be mandatory.

“The government says one thing, but the law says something else. It’s very confusing.”

Ahead of making it a legal currency, the government bought 400 bitcoin worth about $21 million, and plans to buy “ a lot more”. As part of the infrastructural rollout, citizens were incentivised with $30 through the state-issued digital wallet, Chivo – slang for ‘cool’.

As far as the technology is concerned, it supports the Lightning network, a payment protocol layered over cryptocurrencies like bitcoin that enable rapid transactions.

Right off the bat however, technical snafus marred the wallet’s launch as server capacity was overwhelmed.

Director of the non-profit known as ‘Bitcoin Beach’, a thriving crypto community in El Zonte, Mike Peterson told TRT World that while technical difficulties were expected, he was pleasantly surprised by the number of businesses accepting bitcoin from the get go.

“I was very encouraged that this might take root much more quickly than anyone anticipated,” he said. “I think El Salvador has bravely grabbed onto an opportunity to lead the world.”

While bitcoin maximalists around the world have heaped praise upon the government’s plan, passage of the law immediately sparked protests.

On the morning of the Bitcoin Law’s implementation – which stipulates that bitcoin must be accepted as a form of payment everywhere alongside the US dollar – skepticism filled the air. There was uncertain about the adoption process, as the administration, led by young populist president Nayib Bukele, kept citizens in the dark about the rollout’s details.

Fear that instability would be injected into the economy prompted thousands of #NoAlBitcoin demonstrators to pour into the streets of the capital San Salvador, as a bitcoin machine was set alight and crowds brandished signs lambasting Bukele for being an authoritarian.

As it stands, over 70 percent of Salvadorians reportedly oppose the government’s reform, suggesting a steep mountain of public opinion to climb before mass adoption becomes realistic.

At the same time Bukele still enjoys strong support, with an 85 percent approval rating.

Martinez sees the fear underpinning the protestors' concerns as legitimate. “To feel fear is normal, we need to be empathetic,” he said.

“Most people don’t understand what bitcoin is and how it works. To change people’s mindset about money, it will take time.”

‘If people can use Facebook, they can use bitcoin’

In the sleepy surf town of El Zonte, Martinez helps run Bitcoin Beach, a social initiative aimed at fostering a sustainable local bitcoin ecosystem. When the cryptocurrency was adopted in 2019, it allowed many residents to transact digitally for the first time.

It was a decision that was transformative and liberating for the community, Martinez said with pride. “People were saving money and buying an asset for the first time in their lives. We saw how it could change their reality.”

Now, the Bitcoin Beach experiment has gone nationwide. With nearly 80 percent of the Salvadoran population unbanked, bitcoin can offer the prospect of financial inclusion to millions.

Martinez added the government will play an important role in fostering connectivity and investment incentives.

To finance the bitcoin rollout, the government has used funds from a $600 million loan by the Central American Development Bank. 200 new bitcoin ATMs have been propped up across the country, letting Salvadorans convert the cryptocurrency into dollars and withdraw it in cash.

State support will be critical, as doubts linger over whether El Salvador is infrastructurally prepared for adoption, coupled with low public financial literacy rates. For even those with smartphones, adequate data plans are not always available.

Furthermore, less than 37 percent of those in rural areas have adequate internet access, signaling a potential obstacle towards widespread adoption.

However, Peterson notes that metric is based on access to high-speed internet at home rather than smartphones, which is how most people access the internet in developing countries.

“The majority of families in El Salvador have a smartphone and make purchases in businesses that have cellular internet service. Ask people if Salvadorans have trouble using Facebook or WhatsApp and people will just laugh at you for being out of touch,” said Peterson.

“If people can use Facebook, they can use bitcoin.”

Slaying the remittance sharks

The decision to make bitcoin legal tender was made only three months ago by Bukele, who announced his plan to the Anglophone world at the 2021 Bitcoin Conference in Miami.

Explaining how the cryptocurrency would provide jobs and financial inclusion to thousands outside the formal economy, Bukele highlighted the advantages that come with being the first mover will attract foreign investment and cheaper financial services.

During the course of his pitch, Bukele identified a primary antagonist: the predatory wire transfer services and traditional banks that extract commissions from remittance dollars sent by Salvadoran emigres.

With 23 percent of the nation’s GDP dependent on remittances and over two-thirds of its population receiving these flows, the implications bitcoin could have for Salvadorans is massive – and potentially transformative for the region writ large.

Through the bitcoin lightning network, funds can be sent from anywhere in the world instantly with virtually no fees, compared to the typical experience of a Salvadoran having to travel and wait for hours only to receive $92 out of a $100 transfer.

With Salvadorans favouring electronic remittance services like Chivo for their remittance transfers, money provider giants like Western Union and MoneyGram stand to lose an estimated $400 million in annual commissions.

New York-based digital marketer Francisco Dominguez, one of over two million Salvadorans living in the US, said he began to use Chivo last week.

“I have multiple family members that I send money to back home, which meant I had to pay separate fees. Western Union charged me transaction fees of up to $18,” he told TRT World.

“When I used Chivo it was a dramatically smaller charge and sent within minutes.”

To uphold his promise that transactions will be commission-free, Bukele has established a $150 million trust that will provide liquidity for citizens who wish to exchange their bitcoin for greenbacks.

The president said there would be no enforcement – if anyone didn’t want to use bitcoin, they were free to “queue up at Western Union and pay a commission” if they wished.

For now, it's unclear whether the Chivo wallet is interoperable with a host of other wallets being used in El Salvador, like Bitcoin Beach and Strike. Is it utilising the bitcoin network rails to simply move bitcoin around in an enclosed system?

Martinez doesn’t think so, as it would undermine the ethos behind bitcoin. Peterson noted that any technical challenges between Chivo and other bitcoin wallets should be fixed as soon as the government works through the rollout.

All risk no reward?

Bukele’s move comes with a host of risks as well.

Cryptocurrency’s volatility is well-known, with selloffs being triggered by a single tweet. To control volatility, the expectation is the government will adopt a stablecoin that can maintain parity with the US dollar.

While bitcoin has much to offer those on the lower end of the socio-economic spectrum and the unbanked, it can also create a pathway for corruption outside the traditional banking system. The blockchain’s decentralised system can open doors to anonymous and illicit transactions like money laundering or ransom payments.

Dominguez believes much of the public’s trust deficit stems from “the nature of how fast the law was rammed through without any cross-political consensus.”

“That itself can be suspicious, because there are good reasons for doing it as well as bad,” he said.

El Salvador’s economic history provides further context to the uncertainty felt by many over the government’s bitcoin gambit.

Prompted by hyperinflation and devaluation, the country abandoned its national currency, the colon, for the US dollar in 2000. But many Salvadorans viewed the process of dollarisation as ultimately benefiting the banking class and elite, as extreme income disparity and declining wages soon followed.

Reminiscent of that period, the belief that bitcoin could be the latest strategy which ends up producing an inequitable outcome isn’t all that surprising.

Furthermore, resource-strapped El Salvador’s focus on developing its crypto infrastructure will likely bring investment from Silicon Valley and an influx of risk entrepreneurs, and with it, potential exploitation and volatility.  

Ground zero for a digital revolution

The macro-implications of El Salvador’s move highlights two different models for digital currency adoption moving forward: a top-down application as a nation-state project versus an international currency chosen voluntarily by citizens.

For countries that do not possess monetary sovereignty, bitcoin offers a neutral monetary policy in contrast to countries that use their own currencies to fulfil domestic policy goals.

Meanwhile, most central banks around the world view central bank digital currencies (CBDCs) as a pathway to “supercharge their monetary policy” and are attempting to either crackdown or bring cryptocurrencies under regulatory control.

De-dollarisation and gaining financial sovereignty then explains the contradictory path taken towards bitcoin adoption by El Salvador: money meant to be beyond government control being pushed by a government that seeks more control over the country.

Until a few months ago, El Salvador being ground zero for a next-generation financial technology like bitcoin was inconceivable. At the same time, it could be the kind of country that stands to benefit the most from the experiment.

“Now bitcoin can be used as a tool to fix many things that were not working before,” Martinez argued.

Compared to advanced economies, bitcoin offers more transformative solutions to underdeveloped and developing nations, according to Peterson.

“Ironically, it will be El Salvador’s lack of access to the traditional financial system that will allow it to leapfrog the rest of the world and develop into a regional economic powerhouse,” he stated rather optimistically.

With that said, only time will tell whether El Salvador turns into a crypto sanctuary and a model to be replicated, or serves as a stark warning to those waiting in the wings.