Lessons from El Salvador

A few months ago, El Salvador became the first country in the world to accept bitcoin as a legal tender. Everyone understood at the time that it would be a kind of experiment to show all the pros and cons of such a “financial revolution” in practice.  Today, we can take a look at the results.

President of El Salvador Nayib Bukele announced on October 27 that the country had acquired another 450 BTC during the latest market pullback. “It was a long wait, but worth it. We just bought the dip!”, – tweeted Bukele. El Salvador now holds 1000 BTC. It is also the first country to officially and on its own behalf engage in cryptocurrency trading.

In a word, the “El Salvador case” is becoming more and more fascinating. It shows what happens with a crypto enthusiast as the head of one of the poor Third World countries most inclined to adopt cryptocurrencies (although the latter notion wasn’t entirely accurate).

In early October, President Bukele announced that 2.1 million people are already actively using the public BTC wallet, which is more clients than in any Salvadoran bank and will soon be more than in all the nation’s banks combined. He emphasized that the figure represents the people using the wallet, not just the number of downloads.

On September 7, El Salvador became the first country to use bitcoin as an official currency, following the Legislative Assembly of El Salvador passing the law on recognizing BTC as a legal means of payment back in June.

However, the problems arose quite early, in the second half of October: the president had to declare the shutdown of the state bitcoin wallet Chivo due to bandwidth problems.

Not long before this, Chivo – an application developed by the government of El Salvador – had introduced a restriction for users: citizens could no longer track the price of BTC in the application. A new rule was meant to prevent the wallet’s use for scalping.

Scalping, for those curious, is one of the strategies for intraday speculative operations in the cryptocurrency market, which involves closing a deal when a small profit of several points is reached. The deal is completed quickly and may only take several seconds in its entirety.

Chivo wallet allows you to transfer Bitcoins via the Lightning Network to other Chivo users or external Bitcoin wallets. Traders would profit by using the “freeze” function – the previous version of the app allowed users to “freeze” the price of BTC, making it possible to compare the price in the application with exchange rates on other sites.

But here’s the crucial point: while in many Latin American countries (Cuba, Venezuela, Ecuador, Brazil) there is a lot of positivity towards cryptocurrencies at the grassroots level, in El Salvador polls show that the overwhelming majority of the people are unhappy with their president’s cryptocurrency initiative. According to the local newspapers El Diario de Ho and La Prensa Grafica, which cited the Central American University September survey, 7 out of 10 Salvadorans thought deputies should roll back the crypto legislation.

The study titled “Salvadorans have an opinion on Bitcoin and the socio-economic situation in the country” highlights that 66.7% of the population think that the country’s Legislative Assembly should repeal the September 7 law. Only 5.5% of people surveyed are “very interested” in using Chivo e-wallet for bitcoin payments. When asked whether the use of bitcoin should be mandatory or voluntary for the people of El Salvador, 95.9% of participants said “voluntary”.

In addition, it was reported that 6 out of 10 Salvadorans “don’t agree or categorically disagree” with the government’s decision to spend a budget on the implementation of Bitcoin in El Salvador. Regarding the BTC’s impact on households, more than half of the population – 54.3% – believes that the innovation will increase the price of the basic consumer basket.

Finally, one-third of Salvadorans believe that their families’ economic standing will worsen with BTC as legal tender, notes El Diario de Hoy.

So, why is this? According to studies, crypto is readily adopted by the population of developing countries, whose own monetary systems are in a deplorable state – for example, they are subject to huge inflation. Or those where various regulatory authorities run rampant and hike up taxes. None of this is true of El Salvador: the country has used the US dollar as its main currency since 2001. It means that in El Salvador, there wasn’t really a problem for crypto to solve.

Instead, the country received tons of negative feedback from international financial organizations. All of the Big Three rating agencies said that El Salvador accepting bitcoin as legal tender could negatively impact the country’s credit score. Back in August, Fitch Ratings released a report detailing how El Salvador’s adoption of BTC as its legal currency could push the country towards “regulatory and operational risks”. Moreover, Fitch claimed that moving to bitcoin would negatively impact the country’s insurance system.

In June, the Moody’s agency downgraded the country’s rating from B3 to Caa1, highlighting the “deterioration in the quality of policy.” And S&P Global’s report noted “immediate consequences” after the country adopted BTC as a means of payment. According to S&P, one of the most significant risks is the suspension of cooperation with the International Monetary Fund (IMF). “The risks of accepting bitcoin as legal tender in El Salvador seem to outweigh the potential benefits.”, – concluded S&P.

These statements by S&P Global followed specific events. On September 15, protesters took to the streets in opposition to bitcoin as legal tender and the steps of President Nayib Bukele to consolidate power. During the demonstrations, protesters set fire to one of the newly installed bitcoin ATMs. In the wake of the protests, the human rights organization Cristosal filed a complaint with the Chamber of Commerce of El Salvador, demanding an investigation into the transparency of purchase and installation of bitcoin ATMs.

What are the outtakes? Even though the population and international capitalists were less than enthusiastic about adopting BTC as a legal tender, El Salvador still made an entirely sensible decision. For a country with a weak economy, a country that could be subject to sanctions, this was an excellent way to attract capital and get away from the banking system imposed on them by the larger players on the world stage, while at the same time taking its own banking system to another level. Now they don’t even need to issue CBDC – they can just use BTC like they have been using USD as fiat money.