Playa de El Zonte, El Salvador: a town of 3,000 inhabitants boasting incredible surf, great food, and the pioneering adoption of bitcoin as a main form of payment. Beach vendors, aiming to increase their sales to tourists who frequented El Zonte, decided to start accepting bitcoin as a form of payment. President Nayib Bukele cited El Zonte and similar projects as the inspiration behind the legislative project that legalised Bitcoin as one of the country’s official currencies, the other being the US dollar.
This decision is monumental. El Salvador is the first country in the world to adopt cryptocurrency as legal tender and to actively stimulate its citizens to adhere to it. Alongside legalisation, the government also has offered a free $30 dollars worth of bitcoin to citizens who sign up for the digital wallet, known as “Chivo,” and residency to foreigners who invest three bitcoin or more (at least $140,000) in the country. The country has also recently installed 200 bitcoin ATMs, with long term plans involving even the use of geothermal energy from the country’s volcanoes to mine bitcoin.
The adoption of bitcoin as legal currency is clearly a move by President Bukele designed to stimulate El Salvador’s ailing economy. According to him, the use of cryptocurrency could save hundreds of millions of dollars in transaction fees on money sent into the country by citizens working abroad. Remittances, as these funds are known, account for nearly a fifth of the Salvadoran GDP, around $6 billion dollars. Furthermore, supporters of the law have also claimed that this new project will allow many Salvadorans who have never had a bank account to access banking services.
Unfortunately, critics and experts from all around the world do not agree with Bukele’s belief that bitcoin adopting bitcoin will help the struggling Central American country. On its first day as the new currency, Bitcoin’s value crashed nearly 20%. Many couldn’t sign up for the digital wallet as servers went offline due to the overwhelming demand. This instability has led to a well-founded fear that cryptocurrency could bring more instability and inflation, as opposed to the financial freedom purported by its supporters. Those who receive remittances are afraid that such a vital part of their income would be threatened by the fluctuations in highly volatile Bitcoin price.
With no consideration of its risks, President Bukele could be committing El Salvador to a dangerous future; the country has already committed $200 million to the project, 2.7% of the country’s national budget for 2021. A wildly fluctuating currency can quickly result in financial disaster, especially in a country as indeted as El Salvador. Experts have also warned that the economic “boom” produced by bitcoin could end as soon as people spend their bonus credits and incentives to embrace the new currency dry up.
Opposition politician Johnny Wright Sol criticized the legislative project because it was rushed through congress; additionally the project received no input from the public. Salvadorans have not been properly educated on the use of cryptocurrency.In a country where only 30% of people have bank accounts, this is very dangerous. Additionally , studies conducted by the Central American University found that only 4.8% of Salvadorans fully understood how to use bitcoin. Nearly seven out of ten did not approve of bitcoin becoming a legal currency,a statistic backed by the protests carried out against Bukele’s government and his bitcoin project in the capital, San Salvador.
What will actually happen to El Salvador’s economy under this new venture remains still somewhat unknown. For all forecasts and predictions, the adoption of bitcoin takes El Salvador into a completely uncharted territory. While most economists have been somewhat skeptical of the Salvadoran bitcoin project, this has not deterred other countries, such as Panama and Paraguay, from looking in on it with interest. Bitcoin’s standing in Latin America, and the world as a whole, is growing, and so is the uncertainty of what is to come.
Julia Queiroz is a freshman majoring in International Studies and Economics at Johns Hopkins University. She is from Rio de Janeiro, Brazil, and is part of the editorial team of the Hopkins Podcast on Foreign Affairs.