Bitcoin
Our report focuses on how El Salvador could be about to become the only country in the world that uses Bitcoin as a digital national currency – get the lowdown here.
The Sagrado Corazón market is in the heart of San Salvador. The passages are narrow and winding. The colours of the skirts, cloth and dresses shine brightly in the displays of the market stalls huddled together here. There are loud voices everywhere, talking, haggling, calling out.
There’s also the omnipresent squeaky, tinny sound of brightly flashing plastic toys. It’s a neon labyrinth of clothes, food and household goods, and Melvin David Hernandez Esquivel is part of it. The 35-year-old sells chewing gum, sweets and little bags of nuts from his vendor’s tray.
Esquivel’s turnover is US$40 a day; that figure has increased since he also started accepting Bitcoin. “I saw it as an opportunity to earn a little bit extra,” he says, pointing to a sign at his stall. It says that he only accepts Bitcoin payments for a minimum of one dollar; that means that if someone pays for something with Bitcoin, he sells at least four bags of peanuts instead of one. He now makes a quarter of his daily turnover with the digital currency, and it’s increasing.
Provided they have the technology required to do so, businesses in El Salvador now have to accept Bitcoin in addition to the US dollar. It’s been law ever since President Nayib Bukele, who’s 40 years old, set himself the goal of turning his homeland into a Bitcoin state.
In June of last year, at the 2021 Bitcoin Conference in Miami, Florida, Bukele announced by video link that he was introducing Bitcoin as legal tender. The announcement delighted the Bitcoin community but astonished the World Bank, the International Monetary Fund (IMF) and most of his own compatriots. In September of 2021 he got serious and parliament, where his party has a majority, waved the law through.
It seems that was just the start for El Salvador and Bitcoin. Bukele, who calls himself CEO of El Salvador on Twitter and likes to be seen in a baseball cap and leather jacket, is already planning his next moves: crypto bonds, a huge technology centre and energy production from volcanoes – all of which could transform the country, which has at times had the highest murder rate in the world.
One of the reasons Bukele is gambling on digital money is financial inclusion. Around 70 percent of El Salvador’s population is still unbanked, which means people don’t have a bank account and therefore no access to national and international payment transactions.
Another reason is that almost a third of the population lives and works in the US and Canada, and sends money to their relatives with no bank accounts back home. To do so, they use expensive financial service providers. Sometimes, of the $100 sent, only $80 makes it to El Salvador. Both individually, and on a national level, this is an economically significant friction cost. After all, remittances from abroad account for almost a quarter of El Salvador’s gross domestic product.
As Bitcoin, $100 can be sent anywhere in the world for as little as a fraction of a cent thanks to the Lightning protocol, an everyday extension of digital money that enables secure payments in seconds, and without high fees. That’s more than a 99 percent reduction in costs. A transition to this more efficient payment infrastructure is therefore in the national interest as the bottom line means more money coming into the country. The main beneficiaries are, of course, the people who gain access to that money, which is an advantage many Salvadorians can understand and is why they are willing to give Bitcoin a chance, even if it is strange and new.
In the first weeks after Bitcoin’s introduction in El Salvador, long queues formed at the new state cash machines where people can both pay in and take out Bitcoin and dollars. In late September 2021, the president announced, via his favourite mouthpiece, Twitter, that in just three weeks 2.1 million Salvadorians had downloaded the Chivo app, the state Bitcoin wallet. This made El Salvador the first country in the world where more people used Bitcoin wallets than bank accounts.
The small Central American country is now teeming with blue Chivo machines, heavily guarded by police or military with weapons, where people can buy digital credit or convert Bitcoin into dollars. Information points are there to help explain the new currency, but that doesn’t guarantee that it resonates with everyone.
At one stall in the Mercado De Mejicanos in the north of San Salvador, we meet Rosario, who doesn’t want to give her full name or age. She sells everyday items such as paper bags, pickled beans and spices, mainly to workers or day labourers. Before speaking, she withdraws deeper into her stall. She seems agitated and looks around nervously. She says she’s never heard of Bitcoin. Nobody came by to explain anything to her, nor is she interested. She buys all her goods in cash and everyone that comes to her also pays cash. Rosario also says that neither she nor her customers are attracted by the $30 starting balance the state is giving to every Salvadorian who downloads the Chivo app.
The president, who likes to pass himself off as youthful, is most concerned with making a close connection to the younger population, for many of whom he’s something of a pop star. Younger people have thus far shown greater enthusiasm for the digital money, at least those who grew up with smartphones and the internet and are less fearful of digital contact.
Nelson Eduardo Martinez Lovo is just one example of a young Salvadorian Bitcoin adoptee. Like many of his friends, the 24-year-old already had an account at an online Bitcoin exchange before the pandemic. “My father still likes to write bills out by hand,” he says with a laugh. Together they run the Sopón Zacamil, a large, bright restaurant with dark wooden tables, bordering on gang territory in northern San Salvador, where locals from the area come for lunch.
The green iguana adorning the menu holding a wedge of lime and with a cheeky grin on its face is the house special and also Lovo’s favourite dish. They would happily be paid for it in Bitcoin, he explains, but they have to wait for the payment terminal. It’s on its way from China but the delivery keeps getting put back.
Stories like this are grist to the mill for the country’s Bitcoin sceptics who are suspicious of an increasingly autocratic government. Sergio Arauz is one of them. The government is making it increasingly difficult for investigative journalists like Arauz to research freely or write critical reports. Sometimes only media close to the state is invited to official appointments and government decrees are made on Twitter rather than official websites. And the pressure is growing. “I never would have believed that the time would come where I seriously have to consider leaving the country because I’m a journalist, because I think differently,” says Arauz with a serious expression on his face. Thoughts about exit strategies are now for real.
Arauz sits in the warm wind blowing through an open two-storey beach bar. The sun is setting over the Pacific Ocean behind him. Forceful waves crash against the fine sandy beach. The Salvadorian Bitcoin experiment began back in 2019 here in El Zonte, where two dusty streets form the centre of a surf spot.
Unlike the national conversion, no one at the famous Bitcoin beach was forced to take Bitcoin. This was a voluntary, grassroots project, an attempt to create a little circulation economy using digital money. A community project by the people for the people. But its success attracted the interest of developers, investors and the government, who rolled it out across the entire country, and that’s a mistake, according to Arauz. “I’m not against Bitcoin per se,” he says, “but rather against the way it was imposed on people in the country. Too quickly and by law.”
Why didn’t the government take the time to prepare the introduction of the currency in an orderly fashion, he asks, with comprehensive information campaigns, and provide reliable technological infrastructure? And where is the money the country is buying Bitcoin with even coming from? “They’re accountable to everyone in the country, not just those who can afford the luxury of getting involved in Bitcoin,” he says.
Critics worry that the president would risk tax money with his Bitcoin investments in a country that’s already heavily indebted. Many poorer Salvadorians are also afraid of losing their money due to wild fluctuations in the exchange rate. Poverty in the country is declining but more than a fifth of the population still has to get by on less than $5.50 a day. For low earners, even the slightest fluctuation is a problem and the Bitcoin exchange rate is anything but stable.
All of this doesn’t worry the president at all, though – quite the contrary. In January, 2022, when the Bitcoin rate tumbled, Bukele announced on Twitter that he had bought 410 Bitcoin for $15 million in addition to the earlier investment of about $70 million. “Most people come on board when the price is rising but the safest and most profitable time to buy is when the price is falling. It isn’t rocket science,” he wrote. He didn’t answer whether he had bought the Bitcoin with state money or his own private assets. Allegedly, he used his smartphone to make the purchase.
In response to criticism, officials say pragmatically that they absolutely wanted to be first; the history books don’t remember who came in second. The greater goal is to make El Salvador the digital pioneer on the continent. Quite aside from that, interest from the international community is huge.
It’s unclear if it will be beneficial to the population at large. The International Monetary Fund has urged El Salvador to give up Bitcoin as legal tender, saying the risks to financial stability are too high. But Bukele reacted on Twitter with a Simpsons meme.
