In September 2021, El Salvador’s decision to become the first nation to adopt Bitcoin as legal tender (alongside the Dollar) marked a turning point for the well-known cryptocurrency. At the time, officials in the small Central American nation hoped the digital asset would help attract new investments and lessen commissions paid for sending remittance money overseas. Others speculated that using Bitcoin, which can be bought, sold, and traded with an Internet connection, could be an economically empowering move in a nation where 70% of the population lacks a bank account.
Unsurprisingly, the move to adopt Bitcoin brought immense criticism. At the time, an International Monetary Fund (IMF) official questioned how the Ministry of Finance would grapple with budgeting and expected tax revenue due to Bitcoin’s volatility. In July 2021, Moody’s downgraded El Salvador’s debt rating and cited the Bitcoin adoption decision as a “deterioration in the quality of policymaking.”
Now nearly two years later, how has Bitcoin transformed El Salvador’s economic and political landscape? The question is complex and primarily comes down to a matter of perspective.
Traditional Players Still Wary
Of Bitcoin & Bukele
It’s most likely not a surprise that many traditional financial players regard El Salvador’s Bitcoin bet as a failure. In February 2023, IMF officials called on the government to reevaluate plans to expand Bitcoin exposure. Interestingly, the global financial body did admit that the “limited Bitcoin use” in El Salvador so far meant that risks related to the embrace of the cryptocurrency “have not materialized.”
However, concerns over Bitcoin stalled El Salvador’s work with the IMF to secure a 1.3 billion dollar loan in 2022, to which the nation’s leadership announced trade talks with China to help raise enough cash to plug holes in public finances.
In April 2023, documents emerged that the planned and heavily-advertised ‘Bitcoin City’ mining tax haven perhaps never existed. A Ministry of Public Works report noted how “there is neither the Bitcoin City project nor is there knowledge of it.”
Other research suggests Bitcoin adoption across El Salvador remains low despite immense public outreach and investment. An October 2022 survey, while only polling just 1,269 residents, found that 17% agreed the Bitcoin push was a success, with 66% arguing the policy was a failure.
Many Bright Spots With
The Bitcoin Experiment
Despite much negative press, data shows that the bet on Bitcoin by El Salvador’s leaders is bearing fruit. Research in May 2023 shows how 1.9% of remittances, or about $96 million, were sent via crypto eight months after the nation adopted Bitcoin as a legal tender.Data shows that while remittance fees to El Salvador were already relatively low (2.85%), Bitcoin’s fees were nearly half as much on average, which meant Salvadorians saved nearly $4 million in remittance fees, according to CoinDesk, by switching to Bitcoin in the eight-month timeframe.
Others argue that El Salvador’s Bitcoin pivot is helping bring tourism to the country. Visits were up 81% in May 2023 from 2022, relative to pre-pandemic levels. Research shows that overall GDP could rise by at least 3% if this trend continues. A jump of this magnitude would be transformative, as about 5% of the nation’s GDP comes from tourism.
Travel guide leader Lonely Planet has already rated El Salvador as one of its 11 countries to visit in 2023. While some argue El Salvador’s tourism prospects are more bolstered by President Bukele’s crackdown on gang violence, which has included mass arrests and a public image as a law-and-order leader, Bitcoin remains a substantial part of President Bukele’s messaging of El Salvador as a rejuvenated nation.
The nation’s notoriety as a crypto leader has also brought new business opportunities. For example, in May 2023, digital payments firm Strike established a new El Salvador headquarters, with Strike CEO Jack Mallers touting the Bitcoin-friendly environment.
The Bottom Line On The El Salvador Bitcoin Experiment
Nearly two years in, El Salvador’s leadership remains committed to Bitcoin despite shaky markets and international criticism.
While some of the plans touted by officials have yet to materialize, the jury is still out on the long-term economic impact of Bitcoin on the nation. Nevertheless, some clear benefits demonstrate the power and utility of Bitcoin as an alternative to traditional finance.
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