Because of El Salvador’s bold move, digital money is now on the radar of global policymakers.
On September 7, El Salvador, a small Central American country, became the first to accept Bitcoin as legal tender.
The true meaning of this day for how people all over the world exchange value and what meaning they ascribe to the concept of money will take some time to reify and fully comprehend. However, it is already clear that September 2021 will go down in history alongside January 2009 in terms of financial digitization.
Bitcoin Day marked the first instance of a sovereign state making a decentralized digital asset its national currency, surrounded by controversy, protests, bumpy infrastructure rollout — how else? — but also the joy and optimism of millions around the world who look at this great experiment with hope. Was it, after all, a success?
In the background, there is politics.
El Salvador, a country of less than 7 million people, has long abandoned its claim to monetary sovereignty. It abandoned the colón, its national currency for more than a century, in favor of the US dollar in 2001. The move made a lot of practical sense, given that remittances — a large portion of which came from Salvadorans living in the United States — accounted for more than 16 percent of the country’s gross domestic product at times.
The move by then-President Francisco Flores Pérez sparked protests and was condemned by critics who claimed it was undemocratic and benefited bankers and the wealthy.
Two decades later, President Nayib Bukele — a forty-year-old who rose to power at the helm of a party called New Ideas — added another chapter to El Salvador’s monetary saga, this time by supplementing the country’s existing foreign currency with one that was not bound by borders.
The Bitcoin Law has sparked outrage, much like it did 20 years ago. However, polls that show a lack of support for Bitcoin (BTC) as a new form of payment suggest that a large portion of Salvadorans have a limited understanding of what it is and how it will affect their lives.
Furthermore, resentment toward Bitcoin is frequently linked to resentment toward Bukele, who, despite high approval ratings, remains a divisive figure whose alleged autocratic tendencies worry some international observers.
To summarize, there are good reasons to believe that there is no strong ideological opposition to the concept of decentralized finance in El Salvador, and any opposition that does exist will likely dissipate further down the adoption curve — assuming that implementation is ultimately successful.
On the ground, there is a commotion.
Meanwhile, the somewhat hurried launch of the payments infrastructure was, predictably, far from smooth. The government-run Chivo wallet went down for several hours, and some retail workers were reportedly unsure how to process Bitcoin payments. Soon after the launch, the president took on the role of customer support, tweeting updates on the wallet service’s status.
Nonetheless, according to those who were present to witness El Salvador’s first steps as a Bitcoin nation, things began to smooth out soon after a choppy start. Bart Mol, the founder and host of the Satoshi Radio podcast, tweeted his way from inoperable Chivo ATMs to successfully completing Lightning transactions to pay for pizza and coffee at separate retail locations.
Mol concluded that the overall impression was one of “witnessing history.”
The global financial system’s institutions appear to be less enthused. Since El Salvador’s Bitcoin Law was passed earlier this summer, the International Monetary Fund has taken a passive-aggressive stance toward it. Perhaps if this experiment yields positive results, the IMF and other global financial institutions will reconsider?
Some legal professionals are skeptical of this possibility. Counsel Zachary Kelman expressed his belief that global financial institutions will never accept Bitcoin as a national currency:
“The stated reasons for opposing El Salvador’s adoption of BTC (environment, transparency) are not the real reasons, which is the threat crypto poses to the established global political order and banking system. As a result, I doubt that these international organizations will ever be widely supportive of Bitcoin.”
Other nation-states, on the other hand, are keeping a close eye on things. To be sure, El Salvador’s position as the region’s remittances leader, combined with its previous experience in outsourcing the national money function to a foreign currency, is a rare combination. Even if they could muster political will to make decentralized money legal tender, most other countries face higher hurdles.
Nonetheless, the potential benefits of El Salvador’s move may persuade other countries to take Bitcoin as a payment infrastructure more seriously. According to Amanda Wick, chief of legal affairs at blockchain analytics firm Chainalysis, cryptocurrency is an ideal technology for remittances and is thus well-positioned to serve remittance-heavy economies:
“Many citizens [in El Salvador] lack access to traditional financial services, which could increase financial inclusion.” These motivators may shed light on which countries will follow suit. According to our research, these are already popular use cases in countries throughout Latin America, Africa, and Southeast Asia.”
The reported acceleration of other countries’ central banks’ digital currency research programs, the push to define cryptocurrency’s legal status in Ukraine, and discussions in Panama to make cryptocurrency a legal alternative payment method can all be viewed as spillover effects of El Salvador’s bold initiative.
Clearly, not every country is in a position to adopt Bitcoin as its national currency. However, on September 7, almost everyone was forced to reconsider their position on the global digital money map.
Regardless of the outcome of the El Salvador experiment, the Central American country’s pioneering example has already pushed cryptocurrency deeper into the mainstream political agenda than it could ever get without recognition by a sovereign state.