On Tuesday, El Salvador introduced bitcoin, a type of cryptocurrency, as their new legal tender. For some twenty-odd years, the dollar had been the country’s official currency. Now, the nation is going to be using cryptocurrency alongside it. The announcement was first made in June 2021 and was met with awe, excitement and fear.
But why did El Salvador adopt Bitcoin?
While countries like the US, UK and China have started looking into the possible launch of their own Cryptocurrency, El Salvador made a bold move in introducing it as their legal tender. Masses around the world have found the move surprising, to say the least. The country has had its fair share of economic problems for a while now and the pandemic has only worsened their situation. According to officials, the move was carefully thought out after taking all factors into consideration.
El Salvador is highly dependent on remittances (the transfer of money from foreign workers to the homeland), and it accounts for a fifth of their GDP. The transaction costs on transferring these remittances are extremely high (often upwards of 10%), meaning that the country has been losing out on a lot of foreign exchange entering their country.
Furthermore, 70 per cent of the El Salvador population doesn’t have access to bank accounts. With bitcoin as legal tender, people will be able to make quick and cheap payments from anywhere. The adoption of bitcoin as official currency is also expected to boost foreign investment in the country. This could essentially solve two of their biggest financial problems.
As a gift, each citizen of El Salvador was given $30 worth of bitcoin to promote its usage. The government also made it mandatory for all shops and retailers to accept bitcoin as tender.
How successful has the move been?
The country faced technical glitches on the very first day of bitcoin use. To access their bitcoin “money”, Salvadorans need to download an application called Chivo. The customers can then scan the QR code and pay for items. In fact, the application has also tried to incorporate elements such as “out there” and hip. The word ‘Chivo’ itself roughly translates to “cool”. The app, however, crashed multiple times during the course of the first day. These hiccups also drastically affected the value of bitcoin on September 8. Within 24 hours, the value dropped 15% from $52,000 to $44,000 per bitcoin.
Numerous people also stood in ATM lines to try and get their $30 bitcoin bonus converted into paper money. But the ATM machines stopped working and dispensed money to only three people.
Many stores around the country are also facing issues accepting payments through bitcoin. As of Thursday, only about 0.0001 per cent of daily transactions were made through the new currency.
The International Monetary Fund and other credit rating organizations have voiced their concern about the acceptance of cryptocurrency. They believe that this move puts the consumers at risk and threatens the stability of the El Salvadorian economy. The country has become a laboratory for bitcoin gamble.
It is still early to say if the move will take off. But many countries see this experience in a positive light, and there might be other legislation following their footstep. A congressman in Panama, Africa is looking into making cryptocurrency their legal tender as well.
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