Bitcoin as legal tender: Update on El Salvador

El Salvador is the smallest country in Central America, known for its mountainous landscape and plentiful volcanoes. In June, 2021, the nation became famous for something else -- becoming the first country in the world to accept bitcoin as a national currency. This means that bitcoin can now be used to purchase virtually anything – from street food, to movie tickets, to paying utility bills.

The passing of the landmark Bitcoin Law in El Salvador brings great potential for hindering corruption, promoting greater financial inclusion, widening access to the internet, and generating new jobs. In June, our CEO Ben Weiss shared our support of El Salvador’s historic decision to accept bitcoin as legal tender alongside USD. Six months later, how is it all going?

Below, find four examples of how the Bitcoin Law has already begun making a positive impact.

4 ways El Salvador’s bitcoin law has proven successful

1. Financial inclusion has increased.

In order to utilize bitcoin as currency, users need a digital wallet. El Salvador introduced Chivo, the national digital wallet, which is available through physical ATMs and as a mobile application. There are now over 200 Chivo ATMs installed across the country, and an application accessible to anyone with a smartphone. Financial inclusion is now as simple as downloading an app. As an incentive for downloading the wallet, the government offered a USD $30 equivalent BTC payment for all Chivo wallet users. As a result, Chivo saw its user base explode, increasing to nearly 3 million recorded users in September 2021, up from 1 million in July 2020. This accounts for just under half of El Salvador’s population of 6.4 million.

In a country where only 30% of adults have access to traditional bank accounts, this represents a marked breakthrough for El Salvador’s financial inclusion. There are now more Salvadorans who own a Chivo wallet than Salvadorans who own a bank account. In addition to a way to increase financial inclusion, the Chivo wallet offers a seamless way for users to build their own personal savings culture, which can create high economic benefit in the long-term.

2. Remittances are now more affordable.

With a large portion of El Salvador’s population earning income abroad, remittances are estimated to make up nearly a quarter of El Salvador’s GDP. Traditionally, remittances are very expensive due to high transfer fees. Using bitcoin as digital currency removes the intermediary in the transfer process, making remittances significantly more affordable. It also means that people can send remittances at a higher frequency, because smaller payments that were previously uneconomical are now much more affordable. This means Salvadorans who rely on remittances can access these funds more frequently, under a quicker turnaround time. A New York Times article shares a story of a young student who no longer needs to pay a fee on money sent by a family member in the US, and therefore has more money in her pocket to pay her tuition and expenses. These seemingly small changes have a large impact on everyday Salvadoran lives.

Fifty commission-free Chivo ATMs have been installed in 10 cities across the US, and in November, President Bukele shared that over 24,000 remittances had been sent via the Chivo wallet. At this early stage, remittances are still largely sent in USD, but the trend is illustrating a slow rise in BTC remittances.

3. New energy sources are being tested to make bitcoin more environmentally efficient.

The cryptocurrency world has been searching for a solution to the environmental challenges imposed by bitcoin mining. President Bukele is piloting a solution by harnessing energy from El Salvador’s 20+ volcanoes to power bitcoin mining. On October 1, he tweeted, “We’re still testing and installing, but this is officially the first #Bitcoin mining from the #volcanode.” The geothermal energy source is harnessed by extracting heat from the core of the volcano which is then used to boil water, creating steam that drives turbines to power bitcoin mining. El Salvador is not the first to attempt this. Iceland, home to over 30 active volcanoes, began trialing this in 2018 and has seen positive economic growth from cryptocurrency. If El Salvador is successful, this could mean significant improvements in Bitcoin’s global environmental efficiency.

Bukele has promised that El Salvador's state-owned geothermal electric company will offer mining facilities cheap, 100% clean, 100% renewable, and emission-free energy from the country's volcanos, and this is a first step to reaching that target. In the long run, the country aims to welcome bitcoin miners from other countries to tap into this renewable energy source. Turning a natural hazard into an energy-efficient source of productivity is a metaphor for the vision President Bukele is setting forth for El Salvador – boldly championing innovative ways to turn challenges into opportunities.

4. Profits are being spent on improving the national infrastructure.

As of early November, ElSalvadorBTC, a Twitter account publishing El Salvador’s profits earned from bitcoins, reported a profit of USD $12 million. This profit was based solely on the Bitcoin valuation at the time of $71 million. The value has since fluctuated down to $61.35 million in early December, though additional profit has been earned from the Bitcoin Trust and additional bitcoin purchases made since June. President Bukele has already started reinvesting the profits into the nation’s infrastructure, announcing the construction of 20 new schools and one veterinary hospital. These investments will hopefully contribute to more jobs and invest in the long-term future of the country. Further, there are numerous reports of small businesses who have seen business increase since bitcoin became a national currency, and informal economy workers like market stall owners have proudly begun accepting bitcoin.

At the end of November, President Bukele announced the launch of the Bitcoin Bond, an enticing measure to bring even greater foreign investment into the country and champion cryptocurrency on a global scale. He has promised that half of the USD $1 billion bond will be used to build a new “Bitcoin City” at the base of Conchagua volcano, which is being used to mine bitcoin. It will be a sustainable, modern city that charges only value added tax (VAT), with energy powered by the volcano itself.

One facet of national infrastructure that still requires significant investment is increasing access to the internet, which will be required to truly universalize access to bitcoin in El Salvador.

The limitations of El Salvador’s approach

In the past six months, El Salvador has laid the groundwork for a hopeful economic future for its citizens through the passing of Bitcoin Law. However, the early successes from this bold transition have not been without limitations, and many remain cautious of the new currency. For one, there have been protests arising among citizens who are skeptical of the promise of financial inclusion touted by the new currency. Some proclaim the move only benefits the wealthy, pointing to the ongoing fluctuation of Bitcoin and the risks this brings to business owners who are now required to accept the currency. The Chivo wallet has also experienced technical challenges, including a faulty identification system which has led to distrust of the digital wallet. This distrust is echoed by the IMF, who have expressed concerns over the use of bitcoin as legal tender.

Counter to the transparency designed by blockchain technology, all information related to the Chivo wallet is classified. There is also significantly more financial education required to ensure all Salvadorans understand what cryptocurrency is and how to use it.

Final Thoughts

El Salvador is truly leading the world by promoting and legalizing bitcoin as national currency, and the world is watching. There are rumblings that Zimbabwe may be next in line. It is important to remember that while cryptocurrency has rapidly taken the financial world by storm, financial inclusion and economic growth take time. It is too early to make any conclusive statements about the impact of El Salvador’s new currency, but it is clear that bitcoin usage will continue to rise, placing El Salvador at the forefront of global financial innovation and trendsetting. Countries considering legalizing cryptocurrency as national tender should look to El Salvador as an example of how to promote greater financial inclusion among their citizens, keeping an eye on both its successes and failures.

To keep up with the latest, follow President Bukele’s Twitter which is frequently updated with the country’s latest bitcoin-related developments.

Sign up for a free Olliv account and begin your crypto journey today.