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El Salvador Bitcoin Experiment

The Good, The Bad, and The Ugly

El Salvador Bitcoin Experiment - The Good, The Bad, and The Ugly

El Salvador, a Central American country, was the first nation to recognize bitcoin as legal tender. El Salvador had experimented in the past with a change-up in its currency, changing from the colón to the US dollar, which is still used today. Under El Salvador’s new president coming in office in 2021, Nayib Bukele wanted to address the needs of the 70 percent of the population who are unbanked. Bukele wanted to empower his people and try to turbocharge the economy where the unbanked would finally be able to transact, store and exchange wealth via bitcoin.

Unlike permission-based banking, which dictates who may join and under what conditions, bitcoin is a government-agnostic and permissionless system that is open to everyone. Anyone with a mobile device with an internet connection can and would be able to join the bitcoin network and get near-instant access to a new sound money system. Far from the inefficiencies of traditional financial services, such as credit ratings, bank wires, the requirement for physical facilities, and authorization to hold and move money, there’s an active bitcoin open market where anyone can sell 24×7, 365 days a year. Instead of the banking system, Bitcoin would allow for transactions between parties with verifiable, trustless transactional security and consensus without caring who they are or whom they’re doing business with. Bitcoin would be a gamechanger for El Salvador at the time. 

Recently, a study was done by Fernando E. Alvarez, David Argente, and Diana Van Patten from the National Bureau of Economic Research that came out in April 2022, “Are Cryptocurrencies Currencies? Bitcoin As Legal Tender In El Salvador”. Which looks upon breaking down this bitcoin experiment in El Salvador and the government’s “big push” to make bitcoin part of everyday use and its effects. By examining the use, awareness, and acceptance of the official state-run Bitcoin wallet known as “Chivo Wallet,” the research assesses the degree of Bitcoin adoption throughout the country. 

This article summarizes the study into three categories:

“The Good” – The positive aspects of El Salvador’s Bitcoin adoption.

“The Bad” – The negative aspects of El Salvador’s Bitcoin adoption.

“The Ugly” – The challenges that El Salvador must face to be successful at this experiment.

The Good:

  • Using the Chivo digital wallet, citizens of El Salvador can send and receive bitcoins and dollars without fees.
  • Payments from the digital wallet are facilitated by enabling users to pay for any service or vendor using Bitcoin. The app has a built-in QR code scannable option to obtain the recipient’s identification information.
  • To fund their Chivo wallets, registered users may use a credit or debit card, or they can deposit cash from any Chivo ATM.
  • Similarly, there were 251 Chivo ATMs at the time of the report in El Salvador, where users may withdraw money from their wallets without paying any fee.
  • The El Salvador government has offered significant incentives for the adoption of Bitcoin and the Chivo Wallets, which has increased the popularity of the cryptocurrency and influenced its adoption.
  • The two significant incentives from the El Salvador government for the adoption of the Chivo wallet include a $30 bitcoin bonus (a significant amount in a country with a per capita GDP of $4,131) as well as a drop in the price of gas per gallon; $0.30 in 250 gas stations across the country.
  • According to presidential reports from January 2022, the digital Bitcoin wallet has already been downloaded by two-thirds of El Salvador’s population. The popularity and interest in bitcoin among the public have increased substantially with the app’s launch, as may be seen in El Salvador’s Google Search trends for phrases like “bitcoin,” “Chivo,”, “30 dollars,” and “Bitcoin value.”

The Bad:

  • El Salvador’s experiment with Bitcoin adoption has not been entirely successful despite their efforts and incentives to promote it as a contactless payment mode amidst the COVID-19. While most El Salvadorans have a mobile phone with internet access, fewer than 60% have downloaded Chivo Wallet.
  • The Chivo crypto wallet is more likely to be discovered by young, banked, educated males, which means that adoption of Bitcoin is still restricted and not widespread.
  • Less than half of users kept using the Chivo Wallet after utilizing their $30 Bitcoin incentive, indicating that financial incentives were the main driver of Bitcoin adoption in El Salvador but not enough for its continued use.
  • In February 2022, only 1.6% of remittances were sent through digital wallets, according to the Republic Reserve Bank of El Salvador, indicating that Bitcoin was not adopted for taxes or remittances at any significant scale.
  • Only 20% of the firms accepted bitcoin as a payment medium, and only 4.9% of all sales were paid in Bitcoin, while 88% of businesses transformed their bitcoins to dollars to avoid volatility. These businesses mainly comprise large firms, depicting that cryptocurrency is not predominantly an accepted medium of exchange.
  • The study concluded that the Chivo Wallet had “almost no new adopters” in the first quarter of 2022, and the share of remittances remained the lowest since the launch of the Bitcoin wallet.
  • It also adds that “the median user reports no ATM withdrawals, and no payments sent or received in bitcoin in a given month,” indicating minimal or no adoption of Bitcoin.

The Ugly:

  • In addition to customers’ preference for using cash as a payment method, the biggest challenge to widespread Bitcoin acceptance was users’ lack of confidence in the system. 
  • Policymakers are still challenged to ensure users’ adjustment to the system due to their concerns with Bitcoin or other cryptocurrencies.
  • Awareness and education around cryptocurrencies remain limited to educated citizens who are young and mostly male. 

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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

Author

George Sarantopoulos is the CEO and founder of Access One Solutions, a leading payments provider based in NY. As a serial entrepreneur he is constantly thinking and writing about the future of money, business, politics and his next business.

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