One Year of Bitcoin in El Salvador as a legal tender
A quick review of El Salvador, the first country to adopt Bitcoin as a legal tender
El Salvador was the first country to adopt Bitcoin as a legal tender and replace their currency with it. It is a country in South America with around 6.5 million in population. A year ago, El Salvador was all over the media. Everyone was talking about them. In fact, they still talk about El Salvador today too, but for different reasons. Will dive straight into the details
Nayib Bukele, president of El Salvador, made an announcement back in June 2021 about the adoption of Bitcoin as a legal tender. He also made a Twitter thread back then on why this adoption should happen. One of the biggest reasons was remittances.
A remittance is money sent to another person, usually in another country. Lot of El Salvadorian people who live outside of El Salvador send money to their families. International transactions using intermediary banks or transferring money apps (i.e MoneyGram, WesterUnion) are really expensive. Bukele said that around $6 billion in remittances come every year in El Salvador, from where a big chunk of it gets lost to intermediaries. By implementing Bitcoin as a legal tender, that would save $ from the transfer fees and instead they could use that to invest in public services.
He also argued that this would open El Salvador to potential outside investments from cryptocurrency adopters. Considering that roughly 70% of the population was unbanked (i.e. no bank accounts), this would help those people get access to credit, savings and other financial products which will make their life better.
Keep in mind that, allowing Bitcoin to be used as a way to pay for products/services is different from making it a legal tender. What this meant legally is that, those who offered products/services in El Salvador, were required to let people pay in Bitcoin, there was no option to opt in/opt out for merchants, you were obliged to offer it. Bukele tweeted a screenshot of the Bitcoin law proposal at that time. Article 13. stated that “All obligations in money expressed in USD, existing before the effective date of this law, may be paid in bitcoin.”
They even created Chivo wallet for Bitcoin transactions (btw, “chivo” is a slang for cool). App came pre-loaded with $30 in the Chive wallet so there was an incentive for people to actually download and use this wallet.
What is the after math?
Well, it was all working great initially. At the time when El Salvador passed the law (September 7th, 2021), Bitcoin was trading at around $46k. It even reached to $64k back in December 2021. All the crypto bros were saluting Bukele for the smart decision he made.
There is a research paper that was made on El Salvador’s case and statistics are not that great.
Some of the findings from this paper:
- Most of the people who downloaded Chivo, did it for the $30 bonus and never used it again.
- 57% of people never used Chivo ATM withdrawals
- 89% of them said that they did not receive remittances on their Chivo app
- 87% of the merchants has seen no change on demand since the launch of Chivo app etc..
What now?
Well, it has been a year since the adoption. Bitcoin is sitting at around $19k, which means Bitcoin has lost more than 50% of the value since the adoption.
IMF (International Monetary Fund) urged El Salvador to reverse the decision to use Bitcoin as a legal tender with the reason that “the adoption of a cryptocurrency as legal tender, however, entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.” Sure, enough, Bukele ignored them completely in fact he made fun of them using a Southpark meme on Twitter.
Now, Rating Agencies are after El Salvador.
Fitch Ratings, a leading provider of credit ratings has downgraded El Salvador to CC rating. S&P said that they could downgrade El Salvador in rating in 6–18 months.
It is worth noting that, Fitch, S&P and Moody’s are the the top three credit rating agencies internationally. Whether you like them or you hate them they are really important factor when it comes to countries getting loans. With a low rating like in the case of El Salvador, it is definitely challenging for them to get a loan from IMF or any other financial institution.
