How Bitcoin could bank the unbanked of El Salvador
In a continent with varying levels of economic complexity, El Salvador is experimenting with a new system, and one that could help ongoing concerns over inflation and currency devaluation.
By introducing bitcoin as its second official state currency alongside the US dollar, has El Salvador found the solution that could help transform its economic challenges?
Right now, the dollar has weakened, and in the wake of the global pandemic and mounting debt, its purchasing power is decreasing. As inflation stands at 5% in the US — a thirty year high — things are getting more expensive. And El Salvador — a country whose chief economic partner is the US and whose main currency is the US dollar — has been directly impacted.
As economies all over the world are experiencing similar fragility, the Salvadoran president, Nayib Bukele, was looking for a solution that would provide his country with economic safety and independence.
And so, in a world first, El Salvador is about to make bitcoin legal tender. The government is rolling out its promotion by giving US$30 in free bitcoin to citizens who sign up for its national digital wallet, Chivo. The US dollar will remain the country’s official currency.
How can the country work two currencies concurrently? Bukele has provided some insight into how he expects to manage this in his country. Prices remain in dollars, but citizens are given the option to pay the equivalent price in bitcoin via Chivo. But what benefit does this carry to Salvadorans?
Financial access for all
One of the overriding values of cryptocurrency is the democratisation of the financial system: the idea that everyone has the opportunity to own digital currency regardless of their economic status.
One third of the world is currently “unbanked” — that’s around two billion people who cannot get access to a traditional financing system. In El Salvador, 70% of the adult population do not have a bank account.
This has a significant effect on a nation’s economy. Without access to banking, people are unable to save, or properly progress financially. Holding on to cash is risky, and the owner cannot benefit from any interest that could be accrued in a savings account.
The Salvadoran government hopes that introducing bitcoin as a currency will open up financial inclusion to these people. All that is required is a digital wallet on a mobile device, which is protected by a PIN. Many platforms that offer these wallets also offer competitive interest rates. This could, in theory, be game changing for the country.
Investment from overseas
Bukele is optimistic that the move will make the country a more attractive prospect for foreign investors, reducing the cost of financial services, and bringing down the cost of receiving and sending bank transfers. El Salvador is particularly reliant on remittances from overseas which account for a fifth of the country’s GDP. According to the World Bank, this is one of the highest rates in the world.
Bukele’s interest in foreign investment is connected to the volcanoes across El Salvador, which are being sold to investors as a way of developing geothermal energy for mining bitcoin.
Decentralised currency
Having undergone currency substitution with the US dollar in 2001, El Salvador has not owned its own currency for over twenty years. With GDP growth rates lagging behind neighbouring countries and developing countries as a whole, dollarisation has long been unpopular, with 62% of the population regarding it as damaging.
The bitcoin option provides the country with a decentralised currency, and one that is cryptographically secure, tamper-resistant, and globally transferable. For a country that needs to boost its economy, Bitcoin appears to tick a lot of boxes.
However, this change is not without its detractors. Many citizens are not convinced that a secondary digital currency is the answer to the country’s problems.
Volatility
Many Salvadorans are protesting over concerns regarding Bitcoin’s volatility. Can a nation with persistently low levels of economic growth manage the risks as well as the reward of this currency?
The general forecast is that Bitcoin will rise over time, particularly as it becomes a more accepted currency and the supply decreases. Many analysts speculate El Salvador’s project could make its inhabitants very wealthy if the expected rise goes to plan. However, these long term speculations aren’t enough to instil confidence in a nation with a low per capita income.
Infrastructure
Sceptics are also not confident that the country has the infrastructure in place to support a bitcoin-based economy. Internet access is patchy in some areas, and only 33.82% of the population (as of 2019) were classed as internet users.
From May 2018 to May 2019, broadband internet in El Salvador averaged a download speed of 2.93 Megabits per second (Mbps). In contrast, a ‘good’ internet speed is around 25 Mbps. To overcome this, the government has promised major investments to internet connectivity across the country.
Bitcoin Beach
Despite these fears, a bitcoin microeconomic system has proven successful, and is one that the Salvadoran government has studied with keen interest. El Zonte, otherwise known as Bitcoin Beach, is a surfing town on El Salvador’s Pacific coastline and has been operating on bitcoin as its chief currency for a number of years.
In 2019 an anonymous American donor started seeding El Zonte with bitcoin. Since then the local economy has steadily grown, with workers receiving their salaries, tourists paying for goods, and shops, shacks and services all accepting bitcoin. The result has been transformative, leading to a real estate boom, community projects and education funding.
But can the success of El Zonte translate to a national scale? Latin America has long struggled with a financial system that doesn’t work for the region, and it could be argued that it was simply a matter of time before alternatives were considered.
However, what’s happening in El Salvador also highlights bitcoin’s benefits — its introduction around a traditional financial system, the relative simplicity of wallets, and its easy integration into local business and communities.
The role of Bitcoin in El Salvador is unique, but may soon prove to be the blueprint for any nation grappling with historic turbulence and instability within their own economy.
