Can El Salvador's #BitcoinDay Be the Saviour of Bitcoin?

Wiser! #33 (Premium): El Salvador are the first nation in the world to adopt Bitcoin as legal tender. It's a gamble for President Bukele, but will it pay off?

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All-in on Bitcoin

El Salvador has gone all-in on Bitcoin.

Twenty years ago, El Salvador adopted the US Dollar as its official currency. This week, they added Bitcoin as legal tender alongside it.

This is historic because it means that the cryptocurrency has become legal tender for the first time anywhere in the world.

Bitcoin aficionados around the world see this as a sign of great things to come in the nation that translates in English to "the saviour".

What struck me is the extent to which President Bukele and the El Salvador government have gone to promote and educate this move. The public service broadcasts promoting the use of the Chivo wallet explain in layman's terms, that even my mum would get, how to use Bitcoin.

This tweet threat from President Nayib Bukele is in Spanish, but you don't need to speak the language to see that there's nothing geeky, nerdy or technical about the explanation for how to use Chivo or spend Bitcoin.

El Salvador has used the incentive of $30 of free Bitcoin for every new signup of the Chivo digital wallet. Interestingly, El Salvador would need around 4,000 Bitcoin to be able to do that for every one of its citizens. Which it can't do because it doesn't have them (the central bank is reported to have a stash of around 400 BTC).

Bitcoin in everyday use

As Bitcoin became an official tender on Wednesday, there was a flurry of videos and stories featuring purchases with major brands using Bitcoin.

The attached video clip is one of many from El Salvador showing Bitcoin being used in Starbucks, McDonald's or ATM machines...just like any other legal tender.

But this was more than just people in the street tweeting about buying their flat white or egg McMuffin.

In a clearly coordinated effort, major brands were all geared up to promote the launch.

So, why have El Salvador done this?

President Bukele first announced his plans for Bitcoin only 3 months ago (at a crypto conference in Florida). A week later, El Salvador passed a law to make Bitcoin legal tender as a valid form of payment for taxes and settlement of debts.

The law forces businesses to accept Bitcoin as payment (if they are technically able to) and does not give them the ability to refuse to take it or opt-out.

Which begs the question, why has Bukele done this?

When Bukele announced Bitcoin at the Miami conference, he talked about a vision of "a better future for humanity" with Bitcoin at the centre of it (in a Jack Dorsey kind of way).

Which is all very abstract. But it seems that there are some very practical reasons for this disruptive experiment from Bukele.

Financial inclusion

El Salvador is a poor nation and a significant percentage of its citizens will be classed as "unbanked". Bitcoin and the use of a digital wallet (you only need a phone) will bring the unbanked into the financial systems (just as we have seen in China with the impact of WeChat and Alipay).

Read about China's transition to a cashless society here.

Remittances

Around 2 million citizens live and work overseas, sending money back to El Salvador. In 2020, they sent nearly $6 billion back home, accounting for around 23% of the nation's GDP. This is a significant number!

However, the cost of sending money is high when using traditional money transfer services from the likes of Western Union and MoneyGram. As much as 12.5%. And slow, taking up to 3 days to move from A to B.  

Bitcoin payments are near-instant and have zero cost. President Bukele has stated publicly that he thinks the nation's Bitcoin adoption will cost the money transfer firms around $400 million a year in lost fees and charges.

Foreign Investment

Bukele has argued that this move makes El Salvador a safe haven for crypto investors. And he hopes to lure investment into the impoverished nation from the crypto community who will be drawn to El Salvador for its adoption of Bitcoin as a national currency.

De-dollarisation

The financial systems in the West, dominated by the US Dollar, have not covered themselves in glory over the past 50 years or so.  China is creating an alternative with its Central Bank Digital Currency and it is hardly a surprise that smaller nations like El Salvador see Bitcoin as a new way to exist outside of the US Dollar.

Not everyone is happy

This is a bold move and the biggest Bitcoin experiment to date, anywhere in the world.

There is little doubt that the populist right-wing President has taken a gamble with this. And not everyone is happy about it.

In El Salvador, some people took to the streets to protest their objections. It was hard to see if these are pure anti-Bitcoin protests or a more general anti-Bukele protest. And recent public opinion surveys in El Salvador have shown a majority of Salvadorans oppose making it an official currency

Both the IMF and World Bank have been very vocal in their objection to the move and have refused to help El Salvador. They fear Bitcoin (and crypto) will have a destabilising effect on the delicate balance that keeps the global economy moving.

And the crypto markets reacted to demonstrate the volatility that still plagues Bitcoin as a reliable currency.

Over a 12 hour period on Wednesday, Bitcoin's price fell from $52k first thing yesterday morning (European time) to $44k, before a muted bounceback to around $46 as I write.

Pricing a Starbuck's flat white today, when the currency is worth c15-20% less then it was yesterday, is going to be a challenge for retailers in El Salvador. We'll have to see how that pans out.

An upbeat President Bukele responded to the drop in BTC price by tweeting that "El Salvador bought the dip", meaning that El Salvador took advantage and increased its holding to over 400 Bitcoin.

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Related Sources of Insight and Information:

Bitcoin is now legal currency in El Salvador — but its rollout hits major snags.
CBS News

Glitches still plague bitcoin rollout in El Salvador
ABC News

Nayib Bukele, IT guy-in-chief: El Salvador’s head tackles bitcoin woe
New York Post

Bitcoin in El Salvador: How will it work?
TechExplore