El Salvador’s Bitcoin Bet: A Bold Move To Boost The Economy And Attract Investors

El Salvador, the smallest and most densely populated country in Central America, made history in September 2021 by becoming the first nation to adopt bitcoin as legal tender. The move, championed by the young and popular President Nayib Bukele, was aimed at improving financial inclusion, attracting foreign investment, and stimulating economic growth. But two years after the launch of the Bitcoin Law, how has the experiment fared? What are the benefits and challenges of using the volatile cryptocurrency in a developing country? And what are the implications for the future of digital assets and Web3?

The Bitcoin Law was passed by the Salvadoran Congress on June 9, 2021, with 62 votes in favor, 19 against, and three abstentions. The law came into effect on September 7, 2021, making bitcoin a legal tender alongside the US dollar, which has been the official currency of El Salvador since 2001. The law stipulates that:

• Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.
• The exchange rate between bitcoin and the US dollar will be freely established by the market.
• The state will promote the necessary training and mechanisms so that the population can access bitcoin transactions.
• The state will create a trust fund at the Development Bank of El Salvador (BANDESAL) to guarantee the automatic and instantaneous convertibility of bitcoin to US dollar.
• The state will provide a digital wallet called Chivo, which will allow users to store and transfer bitcoin and US dollars without fees.
• The state will grant a one-time incentive of $30 in bitcoin to every citizen who registers with the Chivo wallet.

The Bitcoin Law was met with mixed reactions from different sectors of society. Some praised it as a visionary and innovative move that would put El Salvador on the map of the global crypto community, while others criticized it as a risky and unnecessary gamble that would expose the country to financial instability, regulatory uncertainty, and social unrest.

The Bitcoin Law: The Benefits

According to President Bukele, the main motivation behind the Bitcoin Law was to foster financial inclusion and economic development in El Salvador, a country that suffers from high poverty, inequality, and violence. Bukele argued that by adopting bitcoin, El Salvador would be able to:

• Reduce the cost and time of remittances, which account for about 24% of the country’s GDP and are mostly sent by Salvadorans living in the US.
• Attract foreign investment, tourism, and innovation, especially from the crypto industry, which has shown interest and support for the initiative.
• Enhance the financial sovereignty and autonomy of the country, which depends on the monetary policy of the US Federal Reserve.
• Stimulate the domestic consumption and production, as well as the creation of new jobs and businesses, especially in the digital sector.

Some of the benefits of the Bitcoin Law have been evident in the past two years. For instance:

• The Chivo wallet has registered more than 2.8 million users, equivalent to about 43% of the population, and has processed more than $1.2 billion in transactions, according to the government.
• The bitcoin adoption has boosted the tourism sector, especially in the coastal town of El Zonte, also known as Bitcoin Beach, where many businesses and residents use the cryptocurrency for their daily transactions.
• The bitcoin investment has generated revenue for the public treasury, as the government has bought low and sold high, taking advantage of the price fluctuations of the cryptocurrency.
• The bitcoin innovation has attracted the attention and support of prominent figures and companies in the crypto space, such as Jack Dorsey, Michael Saylor, Strike, Bitso, and Coinbase, among others.

The Bitcoin Law: The Challenges

Despite the positive aspects of the Bitcoin Law, the experiment has also faced significant challenges and difficulties, both internally and externally. Some of the main challenges are:

• The volatility and unpredictability of the bitcoin price, which can affect the purchasing power and savings of the users, as well as the fiscal balance and debt sustainability of the government.
• The technical and operational issues of the Chivo wallet, which has suffered from glitches, hacks, and delays, affecting the user experience and confidence.
• The social and political opposition to the Bitcoin Law, which has sparked protests, lawsuits, and strikes, mainly from sectors that question the legality, necessity, and transparency of the initiative.
• The regulatory and legal uncertainty of the Bitcoin Law, which has raised concerns and warnings from international organizations and institutions, such as the IMF, the World Bank, the FATF, and the US government, regarding the potential risks and implications of using bitcoin for money laundering, terrorism financing, tax evasion, and macroeconomic stability.

The Bitcoin Law: The Future

Two years after the implementation of the Bitcoin Law, it is still too early to draw definitive conclusions about its success or failure. The experiment is ongoing and evolving, and its outcomes will depend on various factors, such as the market dynamics, the user adoption, the government policies, and the international reactions. However, what is clear is that El Salvador has taken a bold and unprecedented step in the world of digital assets and Web3, opening new possibilities and challenges for the future of money, technology, and society.