In 2001, El Salvador decided to abandon “colon’, its own currency, and adopt the U.S. dollar as legal tender. The reform was intended to control inflation in the country and improve trade relations with the U.S.
But the dollarisation of El Salvador hasn’t been successful in reviving its economy, which is still dependent on remittances and struggles with a low GDP. It’s still in the league of poor countries in Latin America.
20 years later, the Salvadoran government has kickstarted yet another move in an attempt to salvage the economy. The only difference - this time around, the country has adopted bitcoin, the world’s largest cryptocurrency, as legal tender.
President Bukele’s Bitcoin Experiment
The quest to make bitcoin legal tender in El Salvador started earlier in 2021 when president Nayib Bukele announced his plan for the same. On June 9, 2021, the Salvadoran parliament proposed legislation to accept bitcoin as legal tender in the country.
September 7, 2021, brought the enactment of the Bitcoin Law in El Salvador. The move was preceded by Bukele purchasing 400 bitcoins (worth more than $20 million). Also, the administration installed nearly 200 specialized ATMs that facilitate funds withdrawal by converting bitcoin into USD.
So, what does accepting bitcoin as legal tender actually mean for businesses and residents in El Salvador?
Cryptocurrencies, such as Bitcoin and Ethereum, are already legal in various countries in Central America, including El Salvador. That means consumers can buy and trade bitcoins, as well as use them to purchase commodities.
But adopting cryptocurrency as legal tender makes it mandatory for businesses and vendors in the country to accept them. It no longer gives the payee the freedom to ask for payments to be made in a fiat currency.
That’s precisely the restriction the Bitcoin Law imposes on business owners and service providers in El Salvador.
Protests, Criticism, and Technical Glitches: How El Salvador Is Reacting to the Bitcoin Law
Bukele publicized the legal tender of bitcoin as a move to improve the country’s GDP. Also, it’s aimed to make it easier for Salvadorans living in foreign countries to transfer money to their families back home. It’s crucial considering they spend $400 million annually on commissions for foreign remittances.
But the legislation has been met with widespread criticism from Salvadoran citizens, as well as respectable financial institutions, including the World Bank and International Monetary Fund.
Protests Erupt in Response to the Bitcoin Law
Across El Salvador, people took to the streets to protest against the Bitcoin Law. While crypto-evangelists believe the move will help make digital currencies more acceptable, skeptics fear that it’ll become an easy route for money laundering and tax evasions.
That isn’t surprising considering the confidential and untraceable nature of bitcoin transactions. Many Salvadorans fear that the Bitcoin Law will make it easier for criminals and drug lords to get away scot-free.
Also, the unregulated nature of bitcoin makes it easy for people to fall prey to online cryptocurrency scams. Getting your money back from such a scam requires the intervention of an experienced funds recovery specialist.
Unfortunately, most hawkers, street vendors, and shopkeepers in the country won’t have access to reliable fund recovery specialists. Nor are they in a position to bear the legal costs of dealing with crypto scams. They lack the education and resources to manage bitcoin wallets as well.
It’s important to note that internet connectivity in El Salvador isn’t remarkable either. More than half of the country’s population still doesn’t have access to the internet. Even for people who have access to the internet, connectivity is erratic at best.
The Implications of Bitcoin’s Volatility
Cryptocurrencies are notorious for their volatility. It’s the most obvious reason that’s deterring residents of El Salvador from embracing the Bitcoin Law. Prior to the legislation, bitcoin was valued at nearly $52,000. But as of this writing, the currency’s value has plummeted to less than $46,000.
That makes it impractical to use bitcoin for the buying and selling of goods/services. Vendors will have to constantly tweak their product prices according to the changing value of bitcoin. Also, if the currency is going to lose value, they’d be less willing to accept payments from customers.
On the other hand, consumers might be unwilling to part with their acquired bitcoins, in the hope that they’ll gain value in the future.
The Road Ahead for El Salvador
A currency that loses its value due to an unassuming tweet by Elon Musk isn’t the most ideal for legal tender. It’s up to the Salvadoran government to equip the people with the necessary resources, tools, and education to safely use bitcoin. Also, they’ll need to weed out the technical issues surrounding Chivo, the government-backed bitcoin wallet.
While protesters have wreaked havoc in the country, they have nothing against bitcoin, in particular. They’re protesting against the government’s lack of transparency and foresight in implementing the Bitcoin Law. Time will tell whether the law achieves the publicized GDP spike or repeats the mistakes of the dollarisation of El Salvador.