Cryptocurrency adoption in El Salvador has been on the rise in recent years, and the country was the first country in the world to accept Bitcoin (BTC) as legal tender. This landmark decision caught the attention of the global cryptocurrency community and sparked debate about the potential benefits and challenges of widespread adoption.
El Salvador’s controversial move to adopt cryptocurrency would not have been possible without President Nayib Bukele, who drew international attention after announcing his plan to accept Bitcoin and signed it into law. The legislation required all businesses across the country to accept Bitcoin as a form of payment for goods and services. As legal tender, Bitcoin now has the same status as traditional fiat currencies, which worries other regulators, economic experts and many everyday Salvadorans.
The country’s acceptance of Bitcoin as legal tender has made it easier for Salvadorans living abroad to send money to their families in the country through remittances. Chivo Wallet, the official wallet of the Salvadoran government, claimed to have 2.2 million Salvadorans accessing it per month after announcing Bitcoin as legal tender.
This could potentially increase financial inclusion for these individuals who previously relied on cash transactions or informal financial services. Every user who successfully downloaded the app instantly earned $30 in Bitcoin. However, this mass adoption has not been as easy as expected, as it has faced numerous obstacles, including lack of funds, system problems, and the apathy of everyday citizens.
Bukele also proposed the creation of a low-tax Bitcoin city at the base of the Conchagua volcano that would power the city’s infrastructure and cryptocurrency operations. The project will be financed by selling $1 billion worth of bonds, known as Bitcoin bonds or volcano bonds, with an annual interest rate of 6.5% and a maturity of 10 years.
El Salvador’s adoption of Bitcoin has generated a lot of interest and has the potential to pave the way for wider cryptocurrency adoption in other countries, but it remains to be seen how this experiment will pan out.
What worked and what didn’t?
El Salvador’s decision to make Bitcoin legal tender has raised concerns among its citizens due to the volatile nature of the cryptocurrency and the uncertain success of the plan. While some parts of Bitcoin’s legal tender implementation went according to plan, many did not, resulting in some unintended consequences.
El Salvador’s credit rating and relationship with the International Monetary Fund (IMF) have suffered as a result of its adoption of Bitcoin. Domestic borrowers have been forced to charge higher interest rates as investors become less willing to lend to the country. In addition, due to significant risks to financial and market integrity, financial stability and consumer protection, the IMF recommended that El Salvador revoke Bitcoin’s status as a legal lender due to its volatility, as well as its use in fraud and other criminal activities.
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The World Bank has also raised concerns about the negative effects of cryptocurrencies on the environment, as revealed by El Salvador’s Bitcoin strategy.
Most Salvadorans are still ignorant of Bitcoin. Despite the promises of economic freedom, blockchain technology can be difficult in terms of user experience, and many find it easy to continue transacting with US dollars.
In addition, El Salvador is a poor country with one of the lowest internet penetration rates in the Americas. There are many vendors, street vendors and farmers who are not equipped to handle cryptocurrency transactions. So, despite the huge pressure from the government, the use of Bitcoin for day-to-day transactions is low.
However, the decision to open the economy to Bitcoin has managed to attract foreign investment to the country. Carlos G. Alfaro, technical sales manager at blockchain software firm Koibanx, told Cointelegraph:
“I was able to meet several foreign investors who came because of Bitcoin Law, but who are not only investing in the blockchain industry, but also investing in different areas such as hotels, real estate and franchise companies.”
Before the Bitcoin Law, a large portion of Salvadorans had no mechanism to digitally store their money and transact with each other. Thus, the project introduced the idea of savings and investment to many residents.
While Bitcoin participation and usage among the population may remain relatively low, Alfaro stated that the $30 Bitcoin reward from the Chivo Wallet has acted as a catalyst for citizens to become more interested in savings and investments:
“I think the average citizen is slowly figuring out how to use it, from having a small bank account, sending money both personally and between companies and countries, saving a little and learning how investments work.”
The country’s investment strategy has also moderated. The country bought Bitcoin 11 times in varying amounts and purchase prices based on Bukele’s own tweets. The most recent such purchase was 80 BTC for $1.5 million on June 30, 2022, but now El Salvador buys 1 Bitcoin per day using a dollar cost averaging strategy to minimize the impact of Bitcoin volatility on the country’s economy.
Expectations for 2023 and beyond
There is still demand for Bitcoin in El Salvador, and with announced plans to build a Bitcoin city, the country hopes to continue attracting BTC investors for years to come.
In 2023, El Salvador is expected to expand its administrative capacity to deal with the use of cryptocurrency in its economy, including addressing any possible criminal activities. DitoBanx CEO Guillermo Contreras told Cointelegraph:
“In this sense, there has been a lot of openness, cooperation and communication between the various government agencies and the companies operating under this title, and this is now reinforced with the opening of the National Bitcoin Office. acts as a central institution to resolve all issues related to it.
The new Digital Asset Issuance Law, which will be implemented in 2023, allows the issuance of El Salvador’s Bitcoin bonds to finance the infrastructure of the Bitcoin city and buy more Bitcoins. This law will also allow the development of blockchain-based business models in a controlled environment.
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El Salvador continues to take concrete steps to include Bitcoin in financial literacy programs across the country. In 2023, the country’s Ministry of Education is expected to tackle educational challenges at a mass level with a financial education training module that includes updated content such as cryptocurrencies and e-wallets.
Contreras concluded: “The introduction of Bitcoin and digital wallets has enabled more than four million people to protect their money and receive money securely and instantly from remittances and other sources. In the beginning, of course, there was a sense of fear of the unknown, but fortunately, El Salvador experienced something similar when we accepted US dollars as legal tender instead of Salvadoran colones. It’s a process that takes some time, but finally users have been able to confirm that it is real money like any other currency, and while there are still some hurdles to overcome, the path is well marked and there is a good outlook. .”