As El Salvador is the first country to make Bitcoin a legal currency, each Salvadoran will be able to download a digital wallet with $30-worth of Bitcoin on it.
On June 7, the Congress of El Salvador passed a law making bitcoin a legal tender in the country. It will come into effect on September 7, only 90 days later.
Salvadorans will then be able to buy any goods or services with the digital currency by using an application on their phones. This digital wallet is called “Chivo”, Spanish for a young male goat but slang for cool or great in El Salvador. It is supposed to be available on September. And the President Nayib Bukele, 39, said people who download the app would have $30 in bitcoin on their accounts as an incentive.
The goal for the new official currency is to connect the country with the rest of the world, reduce conversion fees for tourists and energize the economy, the President said during a presentation on June 24 supported by a screen displaying slides.
Bitcoin was already allowed in the country but now, any shops or businesses will need to accept it. In fact, the law stipulates that “every economic agent must accept bitcoin as a form of payment when it is offered by whoever acquires a good or service“. Yet, the President further explained that bitcoins would be optional with the possibility to “accept them, without receiving them” as people would be able to immediately convert bitcoins into US dollars with Chivos if they want to.
The government will guarantee convertibility with the US dollar through a state-owned trust of $130 million. But a lot still needs to be clarified by September 7. The 2-page law, whose 16 articles weren’t even discussed at the Assembly, is indeed “concise“, the President acknowledged.
Numerous challenges in adopting bitcoin
Only 2 ATMS are installed in the country and the plan is to have 14 of them by September 7, only one in each department for the population to start getting used to it. The President considers the complete adoption of the digital currency could take between 5 and 10 years.
The high volatility of bitcoin, which can lose 30% of its value in a few days, is a matter of concern. Such fast fluctuations may affect daily consumption as food price could jump in just a few hours for instance. Moreover, commissions on transactions can go up to 10%.
It also poses challenges on money-laundering. Bitcoin is known to be used by criminals, who could see a way to pay with the currency and easily convert dirty money into dollars with the state-supported fund.
The digital wallet is promised to be easy to use. Nevertheless, only 45% of the 6.8 million Salvadorans has internet access. The President yet considers that the country can adopt the digital currency as El Zonte has done.
El Zonte is a fishing village of 3,000 people on the Pacific coast of El Salvador, popular to tourists for its surf spots. And the city has already been using the application Bitcoin Beach for buying groceries or utilities for the past year.
IMF refused offering technical support
In 2019, a mysterious Californian surfer started to send bitcoins to a local nonprofit that aimed to create a cryptocurrency ecosystem. They developed the app Bitcoin Beach and helped businesses set up systems to accept payments in the digital money. The donor then subsidized the implementation by sending three times $40-worth of bitcoin to each of the 500 families in the community. The adoption of the cryptocurrency in El Zonte really took off during the pandemic and the lockdown measures.
In a country where 70% of the population doesn’t have a bank account, the government perceives the digital wallets like a step into better money management. And it hopes to attract more investment, businesses, tourists, and remittance.
In fact, remittance from the population overseas, who mainly lives in the United States, makes a large part of El Salvador’s economy. According to the World Bank, El Salvador received almost $6 billion in remittance in 2019, roughly 20% of the country’s gross domestic product. “One of the reasons we passed the bitcoin law is precisely to help people who send remittances” said the President Bukele. With fewer intermediaries, digital currency may indeed prove easier, and cheaper, than transferring US dollars.
In 2001, El Salvador abandoned the Salvadoran colón to make the US dollar its legal tender. As such, El Salvador has already lost control of any monetary policy for 20 years now. But it made the import of money easier with remittance or tourism.
Pensions and salaries will still be paid in dollars as it remains the tender of reference.
El Salvador sought for technical support for the implementation of the new law from the IMF, which refused because of “the environmental and transparency deficiencies” surrounding bitcoin.
In the meantime, El Salvador is also looking for a $1.3 billion fund from the IMF to stabilize its deteriorating finances.
- Presidente Bukele confirma el respaldo de su Gobierno al bitcóin, garantizando el pago de salarios en dólares y entregando $30 como incentivo para descargar la aplicación, Gobierno de Salvador, June 2021, Free access