In the last few years, the crypto sector has undergone staggering growth and some developments have taken even the industry veterans by surprise. It is only expected and natural that with time, more countries will include cryptocurrencies in their existing mainstream financial systems. More banks will warm up to the technology and crypto payments will gain wider acceptance across the world, gradually. However, it is evident that a few nations are more eager than others to embrace cryptocurrency. A small country in Central America became the first in the world to make Bitcoin its official currency. El Salvador created history by making Bitcoin its legal tender earlier this year. For 2 decades, the country relied on the US dollar.
Why El Salvador govt took the historic step?
The move by the El Salvador govt took the world by surprise and it gave the crypto sector enthusiasts a shot in the arm. However, the move was not without reason. The move is meant to resolve the hassle of commissions triggered by dollar conversion. Every year, Salvadorans end up spending $400 million in commissions for remittances and a large part of it is sent from the USA. The move taken by the country’s young and charismatic President Nayib Bukele is being hailed by crypto proponents. However, the critics point to the risk of money laundering and uncertainties.
The president added the switchover to Bitcoin will not be forced on the residents. Those unwilling to use Cryptocurrency can still use the older method and pay remittance charges to entities like Western Union.
The experiment resulted in a mixed bag outcome
While the president of El Salvador and his ministers are upbeat about the move to make Bitcoin the official currency of the country, there lurks skepticism and dissent. The residents are divided in their opinions on the fruitfulness of the shift to cryptocurrency. Some are delighted as they feel their relatives will be able to send money from the USA at no extra charges. However, the critics say this move will enhance regulatory and financial risks.
The govt installed a lot of Chivo digital wallet ATMs to launch the project. Mr. Bukele tweeted ahead of the launch that the migration to Bitcoin will take some time. He asked the residents to bear with the process and also admitted there can be some teething troubles. He also stressed the benefits of using Bitcoin as the legal tender. Apart from the freedom from remittance charges, the faster money transfer is a benefit highlighted by the govt.
The critics are however pointing at the hurried execution and lack of a vision. Embracing cryptocurrency to evade remittances commission is a nice idea but it should not be imposed on the population without proper planning, all of a sudden. The country is inhabited by a majority of people with low income and they are not exactly tech-savvy. A majority of the Salvadoran people have opposed Bitcoin adoption- as per the poll results. However, Mr. Bukele’s control on the judiciary and party men resulted in all vendors becoming obligated to accept Bitcoin payments.
While the move by Mr. Bukele took many residents of EL Salvador by sheer surprise and some of them became annoyed, that is not the case everywhere in the country. A section of the population is actually happy that the president made the move. For the last 2 years, a social initiative named Bitcoin Beach is being run, nurturing a local Bitcoin ecosystem at El Zonte. Through it, many residents experienced the advantages of using cryptocurrencies. They feel the Bitcoin Beach experiment has been given a national dimension.
The Chivo Wallet- a hit or miss?
To ensure the residents can access the Cryptocurrency, the govt has been installing Chivo Wallet ATMs. The wallet is a cell phone app. With it, the residents, including those lacking bank account can send and receive payments. To encourage the adoption, Bitcoin worth $30 was given to each resident using the wallet.
While the move seems logical, its execution has proved to be rather shoddy. The app developed snags as the residents rushed to convert their Bitcoin holdings into US dollars. However, the govt did not say anything on its plans to thwart Bitcoin usage for money laundering. Mr. Bukele announced that his govt bought Bitcoins worth $30 million. The govt has a $150 million fund to back the switchover to Bitcoin.
It is not clear if the Bitcoin and dollar funds held by the El Salvador government are stored. The worrying thing is the Chivo Wallet, made with taxpayer funds, is being operated by undisclosed individuals, much like a private enterprise. It is still not clear if the Chivo wallet is compatible with other wallets that are used by people in El Salvador, including Bitcoin Beach.
A section of lawyers is not happy with the way the govt has implemented the switchover to Bitcoin. Mr. Bukele said almost three million Salvadorans are using the Chivo Wallet. However, not all of them are using the app. They are either not ready or fear the extreme volatility of the cryptocurrency. However, some residents said they are able to receive money sent from the USA by relatives- minus any remittance charges.
What is next – a Bitcoin city!
Even as the Bitcoin adoption continues to draw mixed reactions in the nation, President Nayib Bukele is not sitting idle on it. He has some loftier plans and one of these has been revealed. He said a Bitcoin City is going to be made close to the Colchagua volcano. This city will be made near the volcano so that the geothermal energy can be used to supply energy to the city and execute Bitcoin mining. His govt is running a Bitcoin mining venture near the Tecapa volcano already.
To woo the investors, the govt will offer land and infrastructure and there will be no other tax than VAT. Mr. Bukele said the city will be a zero-carbon area. It will be made to entice foreign investors. He talked about prospects like digital education, sustainable public transportation, etc. However, as of now, it remains at a conceptual stage and no fixed timeline has been set for its completion.
What the future looks like for El Salvador’s economy?
Right now, El Salvador is standing at a crucial juncture, as its economy is set for an overhaul. The advantages of using Bitcoin are undeniable. The alternative to paying the remittance charges is certainly worth consideration. A section of the country’s population already uses unofficial crypto projects and they also have access to the internet, in general. So, a switchover to crypto will benefit them in the long run.
However, it would be wrong to overlook certain underlying issues. The govt has kept certain aspects of the Chivo wallet and funding used to power the conversion a secret-which the lawmakers find worrisome. While several Bitcoin ATMs have been set up, not every resident is ready to use those. The financial literacy rate in the country is low and not everyone uses a smartphone, yet. The country may need a more robust infrastructure and awareness for crypto adoption to work. A robust mechanism has to be in place to thwart the risks of money laundering using the decentralized system of Bitcoin.