Introduction

Salvadoran President Nayib Bukele

On September 7, 2021, El Salvador became the first country to adopt Bitcoin (BTC) as its legal tender. From June 5, 2021, when Salvadoran President Nayib Bukele announced plans to introduce legislation to make Bitcoin a legal tender at the Bitcoin 2021 conference in Miami, to June 9, 2021, when the Salvadoran legislative body approved the legislation, and finally to September 7, 2021, when the Bitcoin Law came into effect, requiring all businesses to accept Bitcoin as a form of payment if they have the technological means, the entire process took a total of 3 months. El Salvador’s decision to adopt BTC as its legal tender has profound economic and political reasons.

Historically, El Salvador has faced high poverty rates and challenges such as exchange rate risks and high remittance fees resulting from a significant export of labor. In 2001, El Salvador started using the US dollar as its legal tender, but after a brief period of stability, the country’s monetary policy spiraled out of control. Due to excessive reliance on the US dollar, El Salvador was heavily influenced by monetary decisions made by the US Federal Reserve, which often did not align with the actual economic needs of El Salvador. Therefore, driven by various reasons, El Salvador embarked on another currency reform in 2021. This reform has been met with both support and skepticism over the past two years, and the implementation progress of the reform is as follows.

Reasons for the Reform in El Salvador

Source: investinelsalvador

Various reasons are driving the urgent need for currency reform in El Salvador. While the long-term impact of this decision is still to be observed, the Salvadoran government believes that the benefits of adopting Bitcoin outweigh the potential risks and challenges. The global community will also closely watch El Salvador’s experiment of using cryptocurrency as legal tender. The following five reasons collectively drive this revolution:

Financial Inclusion

Bitcoin, created in 2009, is a virtual currency used for purchasing goods and services like any other currency. One of the main reasons for adopting Bitcoin is to promote financial inclusion because it is decentralized, meaning there is no authoritative institution responsible for its issuance and control. Everything is recorded in a decentralized, globally distributed database. El Salvador relies heavily on cash transactions, and approximately 70% of its population does not have access to traditional banking services. By adopting Bitcoin, the aim is to provide a digital means of conducting financial transactions, allowing more people to participate in the economy.

Remittance Costs

According to the World Bank, remittance inflows account for over 20% of El Salvador’s GDP. The country’s GDP heavily relies on labor exports, and many citizens depend on remittances from family members working abroad. However, traditional remittance fees are high, and the transfer time is slow. Bitcoin, with its peer-to-peer transaction system and no intermediaries, eliminates the need for commission fees during remittances. As a result, Salvadorans can save millions of dollars in remittance costs and significantly improve cross-border remittance efficiency.

Economic Growth and Investment

President Bukele and his government believe that by allowing foreign investors to invest in Bitcoin in El Salvador, BTC as a global currency can improve the country’s economy. Accepting BTC as legal tender will make El Salvador a pioneering nation in the cryptocurrency field, attracting foreign investment and establishing a new economic ecosystem centered around digital currency innovation and technology. The adoption of Bitcoin is seen as the first step towards national economic modernization, embracing digital transformation, and keeping pace with global technological advancements.

Monetary Sovereignty

Relying on the US dollar as its primary currency means El Salvador’s monetary policy is influenced by decisions made by the US Federal Reserve. Decentralized Bitcoin provides the country with a form of currency that is not controlled by any external central bank, potentially granting its financial system greater autonomy. While El Salvador cannot influence US monetary policy, adopting Bitcoin as a decentralized and globally accessible currency offers a form of monetary sovereignty. It provides Salvadorans with an alternative to the US dollar that is not controlled by any foreign central bank or government.

Developing the Tertiary Industry

Primarily the tourism industry, El Salvador hopes to attract a new wave of visitors, especially cryptocurrency enthusiasts and supporters, by adopting Bitcoin. This will help stimulate the local economy and create new job opportunities.

Risks of El Salvador adopting BTC as a legal tender

The decision to adopt Bitcoin (BTC) as a legal tender has faced criticism from both domestic and international sources. Critics have pointed out the high volatility of Bitcoin, which may facilitate money laundering and other illegal activities, as well as the challenges of widespread adoption in a country with extreme poverty and limited internet infrastructure. Additionally, international financial institutions such as the International Monetary Fund (IMF) have expressed concerns about the financial, legal, and macroeconomic implications of El Salvador’s move.

Exchange Rate Risk

Bitcoin (BTC) is a highly volatile cryptocurrency, and this volatility poses risks to both individuals and national economic stability. Fluctuations in the value of BTC can impact currency exchange, import and export trade, and daily life, thus affecting the savings of residents and the stability of the country’s financial system. While Bitcoin is known for its volatility, some supporters argue that it can serve as a hedge against inflation and currency devaluation, especially in economically unstable countries.

Public Skepticism

Surveys and reports indicate that many Salvadorans have a skeptical attitude towards Bitcoin. This sentiment stems from a lack of understanding of the technology, concerns about volatility, and perceptions of the risks of cybercrime.

International Concerns

International financial institutions, including the International Monetary Fund and the World Bank, have expressed concerns about the adoption of Bitcoin as a legal currency, citing concerns about financial stability, transparency, and legal issues.

Current Status of BTC Usage in El Salvador

Under various circumstances, El Salvador has become the first country in history to adopt Bitcoin (BTC) as a legal tender, facing various risks. The international community has been closely monitoring this groundbreaking initiative, and people and businesses are wondering what impact the integration of cryptocurrency into the economy will have. Now, after two years, has this decision promoted inclusive finance and attracted foreign investment while reducing remittance costs? The following analysis will briefly discuss the current situation of Bitcoin usage in El Salvador based on data from the Chivo wallet, international remittance flows, retail transactions, and public sentiment.

Source: Gate.io

Above is a survey report from the University of Central America (UCA) in El Salvador.

According to the data, 5% of the respondents have never used cryptocurrency, 21% have used it once, and 74% have not used cryptocurrency in the past year. Therefore, the Salvadoran government needs to actively promote basic knowledge of cryptocurrency.

El Salvador’s BTC Reserve Status

In November 2022, President Nayib Bukele of El Salvador launched a national dollar-cost averaging program to purchase Bitcoin daily. Although he did not disclose the specific purchase records, the country held 2,381 BTC with an average purchase price of $44,300, based on the available data at that time. According to the dollar-cost averaging program, the holdings would reach 2,753 BTC by November 23rd. Considering the average BTC price of $28,500 from November 2022 to November 23rd, 2023, the average purchase price would decrease to approximately $42,165. However, based on the current Bitcoin price of $37,000, El Salvador’s BTC holdings would incur a paper loss of approximately $5.877 million. Therefore, BTC as legal tender still faces significant volatility risks.

Chivo Wallet Transaction Volume and User Stats

The Salvadoran government actively promotes the use of BTC for various transactions, from small purchases to real estate transactions. To achieve this goal, they introduced a digital wallet called Chivo, which grants citizens $30 worth of Bitcoin for free upon download. This initiative is part of the government’s efforts to promote the adoption of Bitcoin and encourage people to use digital currency. Chivo wallet was launched after El Salvador became the first country in the world to officially adopt Bitcoin as legal tender, with the policy taking effect in September 2021.

The main function of the Chivo wallet is to enable users to store, send, and receive Bitcoin. It allows for Bitcoin transactions locally and internationally, as well as the conversion of Bitcoin to US dollars. The Chivo wallet can be used on smartphones through a mobile application available for iOS and Android platforms. There are reports that the Chivo wallet supports the Lightning Network, allowing users to conduct faster and lower-cost Bitcoin transactions on this network. This provides users with more flexible payment options and eases the transaction load on the Bitcoin main chain.

According to data from the Central Reserve Bank of El Salvador, the total amount of remittances in the country in 2022 was $7.7419 billion, of which $126.71 million was remitted through the digital wallet “Chivo,” accounting for 1.63% of the total remittances. This indicates that the acceptance level of Chivo is not very high, as Salvadorans prefer to transact in US dollars due to the stronger stability compared to the volatility of Bitcoin.

Source: Gate.io

Security Issues and Hacker Incidents

The launch of the Chivo digital wallet has been affected by security issues, with hundreds of accounts being targeted by hackers and funds being stolen, which may be a cause for public concern regarding full acceptance of Bitcoin.

International Comparisons and Reactions

El Salvador’s Bitcoin experiment has garnered global attention, but its success is difficult to quantify due to its complexity and multiple objectives, including financial inclusion and public fiscal revenues. In comparison, Bitcoin adoption seems more apparent in other countries such as Argentina, partly due to the economic stability provided by the US dollar in El Salvador.

Survey and Reports on Consumer and Merchant Adoption

Merchants are encouraged to accept Bitcoin, but the response varies. Large enterprises and businesses catering to tourists are more likely to accept it, while small and medium-sized enterprises face challenges related to technology and price fluctuations. Bitcoin consumer spending still represents only a small portion of total retail transactions, with most Salvadorans continuing to use the US dollar for their daily shopping.

Economic Indicators from the International Monetary Fund (IMF) and World Bank

The introduction of Bitcoin has not yet had a significant impact on broader economic indicators such as GDP growth or inflation in El Salvador. According to the IMF, El Salvador’s debt already accounts for over 90% of its GDP in 2023, and under current policies, public debt is projected to rise to 96% by 2026. The IMF argues that Bitcoin as a sovereign bond issuance asset would worsen El Salvador’s debt risk. The IMF recommends that El Salvador abandon the funding of Bitcoin purchases through the issuance of tokenized bonds and advises the dissolution of the “Bitcoin Trust Fund.” In response, President Bukele of El Salvador stated, “No international organization can force us to do anything” and emphasized that the issuance of tokenized bonds is a matter of “sovereignty.” International financial institutions express concerns about the potential risks brought by Bitcoin volatility and its impact on financial stability.

Conclusion

The adoption of Bitcoin (BTC) as the legal tender in El Salvador is a bold and unprecedented move aimed at addressing specific economic challenges and leveraging the potential benefits of cryptocurrency to enhance financial inclusion, reduce remittance costs, attract foreign investment, and achieve monetary policy independence. However, its implementation faces various obstacles, including public skepticism, inherent risks of cryptocurrencies, and international scrutiny. The long-term impact of this policy remains to be seen, as it may continue to be a subject of analysis and debate in the blockchain and financial sectors.

Currently, the use of Bitcoin in El Salvador is gradually being adopted and there is still significant room for growth. Despite indications of increasing acceptance of Bitcoin, data shows that its overall impact on the economy and daily transactions remains limited. To realize the government’s vision of achieving widespread financial inclusion through Bitcoin, challenges such as technological barriers, price volatility, and public skepticism need to be addressed. In terms of public acceptance, ongoing efforts to strengthen educational activities are needed to enhance public understanding and trust in Bitcoin. Continued improvement of infrastructure, such as the Chivo wallet, is necessary to ensure reliability and user-friendliness. Collaboration with local and international financial experts is essential to mitigate potential risks associated with cryptocurrency volatility. An environment that supports both large and small businesses in integrating Bitcoin into their operations should be fostered. Regular surveys and research should be conducted to monitor the evolution of Bitcoin adoption in El Salvador.

This analysis report will be updated with new data in the future and further analysis will be conducted to track the progress of Bitcoin’s integration into the Salvadoran economy.