El Salvador & Bitcoin: Revolutionary Lessons

El Salvador is a developing country with a population of around 6.5 million people. About 70% of the population does not have access to traditional financial services, leading to financial exclusion and economic instability. The population relies heavily on expensive remittances from abroad, as many Salvadorans work overseas and send money back home. This process is often hindered by high fees and long transfer times. The country's economy suffers from high inflation and is heavily dependent on the US dollar, which was the sole national currency until the introduction of Bitcoin. This reliance on a foreign currency has made El Salvador vulnerable to external economic shocks and has limited the country's financial autonomy.

When President Nayib Bukele took office in 2019, he saw cryptocurrency as an opportunity to break free from inflation and dollar dependency. As an advocate for innovation and technological progress, he recognized the potential of cryptocurrencies like Bitcoin to address the country's economic challenges. Additionally, he aimed to promote financial inclusion and improve the population's access to affordable financial services. The introduction of Bitcoin as an official currency was seen as a means to reduce the costs and bureaucracy associated with sending money from abroad while strengthening the country's financial autonomy.

On September 7, 2021, Bitcoin was officially adopted as the national currency by law. All businesses were required to accept Bitcoin as a means of payment from that point forward. To encourage usage, every citizen received $30 worth of Bitcoin upon downloading a special cryptocurrency app called "Chivo." Among other benefits, the Chivo app also allowed users to get fuel at a discounted rate.

A Rocky Start

What sounds convincing in theory, however, partially failed in reality. In fact, more than half of households downloaded the Chivo app. However, over 60% of them only spent the free Bitcoins and made no further transactions. The circle of daily active users remains small even after nearly two years. It is estimated to be around 20% and is mainly limited to young, well-educated people who already had a bank account and were not the target of the initiative.

The acceptance by merchants and businesses also didn’t go as planned. A year after the introduction of the Bitcoin law, only 20% of businesses accepted Bitcoin as a means of payment, even though it was mandated by law.

President Bukele faced much criticism from his fellow citizens, particularly for imposing Bitcoin on them without sufficiently informing them about the risks and challenges. Especially in the early days, there was a lot of fraud and identity theft. Instead of the $30 in Bitcoin credit, many found empty wallets.

The strong fluctuations in the value of Bitcoin are also viewed critically by many, as they lead to significant fluctuations in purchasing power for the population. El Salvador itself has reportedly invested over $100 million from the state treasury into the cryptocurrency. Due to the Bitcoin crash in 2022, these $100 million are currently worth much less. This has affected the country's creditworthiness. It is therefore not surprising that, according to a study by the Universidad Centroamericana (UCA), more than three-quarters of the population consider the introduction to be a mistake.

Despite all the criticism, there are also many positive aspects. It is also expected that many effects will only become apparent in the long term.

The fact is that the population has already saved over four million dollars in remittance fees in the first eight months. It is undisputed that the initiative has also attracted investments to the country – particularly from the crypto industry. In the long run, it can be expected that the spread of cryptocurrencies will continue to increase. Thus, the developing country of El Salvador could take a leading position in the cryptocurrency economy in the future.

El Salvador also had phenomenal tourism numbers in 2022. Many attribute this to the introduction of Bitcoin, even if only due to the new global attention. Above all, the experiences from El Salvador can serve as a case study for other countries and the world.

The example of El Salvador shows that the introduction of Bitcoin as an official national currency brings various challenges. First, a high level of acceptance among merchants and the population must be achieved. Equally important is a functioning infrastructure with secure and user-friendly wallets to enable the use of Bitcoin in everyday life. Additionally, the population should be educated about the use and risks to prevent abuse and fraud. Furthermore, regulatory frameworks need to be established that clearly define the legal status and taxation of cryptocurrencies to ensure safe and transparent usage.

The story continues

Despite the challenges, cryptocurrencies offer numerous opportunities. Especially in less developed countries, they can promote financial inclusion and provide poorer segments of the population with access to payment systems. By using cryptocurrencies, people without access to traditional banking services can participate in the global economy and make payments quickly and cost-effectively. This can help combat poverty and drive economic development in developing countries. Moreover, cryptocurrencies also offer opportunities for innovation in areas such as financial technology and digital identity, with the potential to improve the lives of many people worldwide.

It remains to be seen whether El Salvador's example will be followed in other countries or even globally. However, it is undeniable that the initiative has brought a lot of attention to the small country. With its bold decision in favor of a decentralized financial system, El Salvador has made history. The eyes of the world are now on the Central American country as it continues to develop and implement its Bitcoin experiment. El Salvador’s decision has sparked a debate about the future of money and the role of cryptocurrencies in the global economy. The world will be watching closely to see how this development unfolds in the coming years.