El Salvador has become the first country to adopt Bitcoin as an official currency. Komodo has previously mentioned some generalizations and effects of this decision. But, what 's the context? What are the reasons behind it? Can it occur in other places around the world?
This is an English translation of a blog post that was originally published on the Komodo Spanish blog.
For those of you who are not in touch with Central American geography, El Salvador is a little country bordered by Guatemala and Honduras, with close to 6.4 million people, and has a high demographic density relative to its neighbors. Its economy, also industrial by regional standards, is dependent on exports (manufacturing, textiles, coffee, sugar, ethanol, chemical products, iron and steel).
At the same time, the Salvadoran economy suffers from inequality, and there are many elements of structural poverty among every aspect of society. As a result, violence and crime have left El Salvador with enormous rates of crime.
On the other hand, a bright spot comes from the advantages of its energy sector. as nearly 50% of the electricity generated comes from renewable sources (geothermal and hydroelectric power stations provide as much as 25% of the total energy output). Also, other two renewables, solar and wind, have been growing recently.
Regarding its past, El Salvador was until recently affected by political conflict, with a civil conflict that lasted from 1980 to 1992, when a peace agreement was brokered by the warring factions and the international community. But, up until now, there are still deep divisions and disputes among the political elements. In 2019, a non-aligned politician called Nayib Bukele became the country’s president after winning the presidential election by promising to combat corruption and gang violence.
Bukele has embarked on ambitious political and financial reforms too, measures that have not been exempt from criticism because of its effects on the health of El Salvador’s fragile democracy.
It’s worth mentioning that in 2001, El Salvador implemented some monetary policies aimed at establishing the US Dollar as its co-official currency, alongside the national Colon. This decision was met with opposition and was unpopular at first. Three years later, the US Dollar displaced the Colon, which stopped circulating. Some people say that the US Dollar has positively impacted the Salvadoran economy by stabilizing it, even considering the initial shock and lower-than-predicted economic stimulus.
On The Way to National Adoption
In June 2021, Bukele proposed legislation to make Bitcoin a legal tender in the country, and it was quickly voted and approved by the national parliament without relevant opposition. The measure will take effect in September.
Indeed, Bitcoin has shown its appeal, both because of its use and technological capabilities, its vision influenced also by several figures inside the crypto world, and aided by politics. Its volatility has also been very profitable to many, especially at a moment when fiat money is on the crossroads and the pandemic continues to jeopardize the global economy. In this context, Bitcoin comes to mind as a solution and not only is discussed but materializes with the help of Bukele and his government.
It is no secret that blockchain technology has attracted global attention, but apart from the other areas where it could be useful, its main asset remains in the economic aspect, among both harsh criticism and staunch support from many. It's important to mention that up until now, none of the previous reforms adopted by Bukele could have such an extent of consequences, national and international, as this. “It will bring financial inclusion, investment, tourism, innovation and economic development for our country," Bukele says. The main reason for adopting BTC could be interpreted as trying to attract foreign investors, who might see El Salvador as a safe gate to trade in Bitcoin, or maybe even a tax haven. As other countries will be affected, we’ll have to wait for their reactions to see if it’ll lead to mass adoption.
Talking About Motives…
There is no doubt that Bukele seeks to stimulate the economy of his country and also to make himself popular in the world with a controversial decision, since, in the opinion of many analysts, it is quite risky. However, all the machinery has been set in motion and a huge promotion has been made, where the government itself through the wallet Chivo, will be giving away $30 in Bitcoin to the entire Salvadoran population, thus promoting its use as a currency of exchange, provided that two requirements are met: to be Salvadoran and registered through facial recognition in the app. This last aspect could be frowned upon, since in order to obtain the gift, people will have to leave their face registered and this information could be used for different purposes, so criticism on this aspect of privacy has increased.
Likewise, a key factor in the adoption of Bitcoin in El Salvador lies in the remittance system. In theory, cryptocurrencies offer an easy way to send money across borders electronically, simply and cheaply, without relying on companies specialized in remittances, which normally charge a high conversion rate. Some data from the World Bank show that remittances in the Central American country represented a figure close to $6 billion, nearly one fifth of the country's 2019 GDP, one of the highest rates in the world. In this matter, there is a tendency towards an ease in the reception and conversion of remittances through blockchain technology, although globally this is still irregular, and somewhat difficult for the population, who are still unfamiliar with the subject. Therefore, the government seems to prioritize an information campaign on Bitcoin and its use as an initial campaign.
However, perhaps Bukele's government is preparing to receive sanctions from the US and Bitcoin would be a good option to evade them, because as the US has no control over Bitcoin, the money could circulate freely, without any problem whatsoever. A similar situation was observed in Venezuela when the US imposed sanctions, which the Venezuelan government mitigated through certain cryptocurrencies, especially Bitcoin. What could happen in El Salvador is uncertain, because while expectations turn towards development, investment, and technology, it’s too early to see whether the gamble pays off, and whether we may judge positively the economically or politically-motivated actions being taken now.
To conclude, El Salvador is assuming a big responsibility with cryptocurrency lovers, for being the first country to take such a risky decision. Undoubtedly, Nayib Bukele will be framed in history for his commitment to blockchain technology, understanding that this technology can be used not only in the economic field, but also in other areas, involving politics, education, health, and other important sectors within the social sphere.
It is a big step for the industry, as Bitcoin has managed to go global in a very short time and El Salvador has taken the lead, moving the crypto ecosystem to the core of economics and society, making its national adoption a (legal) reality for many, both supporters and critics.