One of the new bitcoin ATMs serving the unbanked communities of El Zonte and El Tunco beaches in El Salvador

Two Bitcoin Narratives Emerging from El Salvador and Why Both Are Important

Published in

Coinmonks

8 min readOct 18, 2021

One is Bitcoin is a digital Future Currency, and the other — that Bitcoin is the Currency of the Future

After following our work in Blockchain and Healthcare in East Africa, my dear friend Johni Fisher from Buenos Aires, co-founder of ACHA (Americas Continental Health Alliance) said: “Alex, you should visit El Salvador and develop with us cryptohealth solutions.”

And true, I always wanted to visit Johni and Latin America, but when I read that the El Salvadorian President Nayib Bukele announced on September 6 that he had purchased 200 BTC to make El Salvador the first country in the world to use cryptocurrency as a legal tender, I decided it is time to head down and see for myself what this is all about.

So come September 26, I went to visit both Bitcoin Beach and the capital San Salvador for two weeks. I spoke to government officials and technologists involved in the actual rollout of bitcoin and the government-issued Chivo wallet, as well as to business leaders, entrepreneurs and bitcoin users.

I would like to share three important observations from this visit.

#1: The historical and political climate must be ready for crypto

It is beyond the scope of this post to review the long-standing US foreign policy in El Salvador before and after its civil war ending in 1992, but to appreciate why El Salvador is the first country in the world to adopt bitcoin as a currency, one must understand their economic history, including the dollarization in 2001 (below).

The flooding of the El Salvadorian market in 2001 with US dollar coins rendered its local currency, the Colón, useless (Zachary Taylor and Sacagawea $1 coins)

The El Salvadorian Colón, named after Christopher Columbus, replaced in 1892 the Spanish silver coins. It was pegged to the US dollar (namely: dollarization) at a rate of 2 colones to 1 USD, once it abandoned the gold standard during a military coup in 1931.

But the 2001 dollarization and political/economic integration with the US economy came at a stark cost — not only restricting the El Salvadorian Central Bank function, but incurring on El Salvadorians a significant loss of purchasing power, imposing expensive remittance fees via SWIFT, and creating a large trade deficit.

Faced with an economy that did not generate jobs, a growing public debt, and irregular flow of remittances from the US estimated at 24% of the GDP, (below)

The growing dependence of El Salvador on its US diaspora deepened during COVID Source

the President, that didn’t come from either the political left or right, gained a super-majority in the Legislative Assembly.

This allowed him to rollout an aggressive (and controversial) policy — Bitcoin will be the legal tender and be used to:

Bank the unbanked and dedollarize the economy
Reduce the fees of remittances (estimated to enrich the US banking system $5.4 billion annually)
Help El Salvador become an international hub for crypto-investments, especially in mining, using their geothermal energy (aka volcanodes).

#2: First Narrative — Bitcoin is another Digital Future Currency

When I was there, I saw demonstrations against the use of Bitcoin and the Chivo wallet. Some were wary this change is an authoritarian grab by the President, others objected its forced rollout, a few were concerned how private keys were managed, and many simply agreed that everything is going exactly as expected.

Bottom-up resistance was a feature, not a bug.

Protesters demonstrating in San Salvador, fear Bitcoin will anger the US and bring inflation (source)

However I was interested to take a closer look on not only at what was said, but also who said what and why.

In general I heard a 4-split response to the bitcoin rollout:

Bitcoin/crypto bulls —Bitcoin maximalists argued that the rollout is perfect. Bitcoin is an always appreciating asset, it is the future, and that’s not open for debate.
The U.S. / The IMF press— The Bukele administration is corrupt and this Bitcoin idea and attempt to decrease reliance on the dollar further demonstrates his incompetence and will destabilize financial markets.
Middle-class Salvadorians — Bukele is a strongman and we don’t think Bitcoin is a good idea.
Impoverished Salvadorians — Bukele is a Saint, but we don’t see yet the point in this whole Bitcoin thing.

I must say that when I think of the nature of centralized money and the effect dollarization had on El Salvadorians, many of these criticisms sound to me unconvincing, to say to the least.

All this is in the context of US crypto-regulation being far more invasive than we thought, Federal Reserve Deregulation significantly weakening the financial rules that protect main street, and the recent discovery of the Pandora files, exposing more than 29,000 offshore accounts of 130 billionaires and 330 public officials in more than 90 countries.

Nonetheless, I do think El Salvador’s bitcoin rollout has dispelled three important myths about cryptocurrencies:

The idea that “governments will ban bitcoin” is officially buried. While Mexico, Paraguay are not considering deploying bitcoin now, Uruguay and Colombia are, and Venezuela is experimenting with it, while Panama, Tonga, and the Ukraine are planning an official launch later this year.
The idea that “bitcoin is not a currency because of volatility” is dead. (For an in-depth analysis, please read Ark Invest’s analysis here).
The idea that fiat is eternally good and Bitcoin is a fad is obsolete, especially with calls for the US treasury to mint a one trillion dollar coin (below) to avoid a debt default due to Congress’ inability to arrive to a political compromise.

The idea that the U.S. Treasury should mint a $1T coin and deposit it at the Federal Reserve is to prevent debt default due to Congressional intransigence Source

#3: Second Narrative — Bitcoin is the Currency of the Future, especially for the unbanked

Again, what happened?

In a nutshell, a small central American nation in poor economic health without domestic currency is functioning as an economic US colony and is dependent on US Central Bank policies. The complete lack of access to financial services are causing business to be done informally in cash, and a large diaspora who fled gang violence and a civil war, has no reliable means to transfer or send their money.

But while visiting El Zonte (Bitcoin Beach) I saw not only the limits of fiat currency in a cash-poor, unbanked community, forced to pay 20–30% transactional fees,

I also saw how experimenting with Bitcoin directly helped people and elevated their digital and financial literacy.

With an unprecedented financial inclusion rate at so little of a cost, El Salvador grew its bank account base from 1.9 million (1.3 million of them with a debit card) to over 2.3 million adults with digital accounts in less than a month.

But not only more users were transacting with digital money, benefitting from branchless banking services similar to the M-Pesa in East Africa, they were also starting to wonder about the true nature of money, what are the forces that drive the value of Bitcoin and how can they successfully participate in these new economic activities.

HopeHouse, founded by Mike Peterson, director of Bitcoin Beach, has over 20 social impact programs including education, healthcare, nutrition, transportation and vocational training- all in bitcoin

This transition to a local bitcoin economy is exciting because:

the technology is solid, allowing transfer of money for extremely low fees using Lightning Network for speed and Strike for on-off ramping
the monetary policy is immutable (there are a fixed number of coins that will ever be created, nobody can change that, and anyone can verify the number of coins currently on the network)
Bitcoin is outside of the direct control of any one central body or government, offering new investment opportunities that are uncorrelated to other assets.

However the real magic in using bitcoin is that people and institutions are now adopting and trusting it, causing a huge snowballing network effect.

Nothing like not being afraid from losing cash, and buying a delicious cheese Pupusa with Bitcoin!

Final Thoughts: we need better money

Governments and Central Banks of rich economies usually impose fiscal and monetary policies that are good for them, at the expense of weaker economies. And when these weak economies advance crypto-friendly policies, exempt foreign investors from tax, or simply reduce the price of gasoline to encourage bitcoin use, their quest for financial liberty is referred to as authoritarianism.

Whether bitcoin will become the future financial standard, a hedge against inflation or DeFi will be bitcoin-based is yet to be seen. Some say yes, others say absolutely not, and central banks are developing CBDC (central bank digital currencies) and stable coins as the solution for future international trade and settlements.

But at the end of the day the exact solution is irrelevant. Even after President Bukele is long gone, the network effect of his Bitcoin economy will persist.

He purposefully (or not) gave his citizens the ability to openly engage in a future-proof payment system that is irreversible once started, giving them financial freedom that even western countries cannot offer.

Only time will tell if the clouds of uncertainty will birth a new sunny day (another magical sunset in El Zonte)

And although it is impossible to predict where this all ends, the seeming inability of centralized financial (CeFi) systems to maintain our trust in fiat currency is allowing the poorest people on the planet to participate in a global economy, suggesting that we are at the start of something much, much better.

If you found this content engaging, and have an interest in commissioning content of your own, check out Quantum Economics’ Analysis on Demand service

Join Coinmonks Telegram Channel and learn about crypto trading and investing.

Also, Read

Two Bitcoin Narratives Emerging from El Salvador and Why Both Are Important

#1: The historical and political climate must be ready for crypto

#2: First Narrative — Bitcoin is another Digital Future Currency

#3: Second Narrative — Bitcoin is the Currency of the Future, especially for the unbanked

Final Thoughts: we need better money

Written by Dr. Alex Cahana