Tracing El Salvador’s journey of adopting bitcoin as legal tender

SUMMARY

Bitcoin, the world’s oldest crypto was not adopted as the legal tender in El Salvador overnight. Let’s trace bitcoin’s journey in the island nation:

By CNBCTV18.comJan 24, 2022 7:30:22 PM IST (Published)

September 2021 was a memorable month for Bitcoin. It was the first time a country had accepted the digital token as a legal tender since its debut over a decade ago. El Salvador President Nayib Bukele not just adopted bitcoin as currency but also announced plans to build a Bitcoin City to attract foreign investments. Residents of the proposed city will not pay any tax on income, capital gains, or property. But the world’s oldest crypto was not adopted overnight. Let’s trace bitcoin’s journey in the island nation:

To understand why El Salvador adopted Bitcoin, it is important to know the country’s history. Being geographically close to the US, El Salvador developed dependencies on its neighbor, which gradually led to economical, historical, and military interventions from the former and caused continuous economic turmoil.

A military coup in 1932 and a decade-long civil war starting in 1980 resulted in many Salvadorans fleeing the country. Consequently, the workforce and the number of taxpayers in the economy decreased, and remittances by the country’s people who now worked overseas, increased.

El Salvador currently receives roughly $6 billion in remittance payments annually, accounting for nearly a fifth of its GDP. This means a substantial portion of the country’s population now resides outside the country.

But as the economy continued to weaken, so did its currency, the Colón. This led to the rise of the US dollar as the only meaningful way left to transact in El Salvador. Circulation of Colón seized by 2004.

Even as El Salvadorans remained divided over the dollarisation, President Nayib Bukele announced the adoption of Bitcoin as a legal tender. Bukele and his party continue to claim this is not de-dollarisation and the US dollar will continue to be the dominant currency alongside Bitcoin.

Apart from reducing the strong dependence on the US dollar in its economy, the adoption of bitcoin was also aimed at reducing the costs of transfers, boosting local consumption, and drawing foreign investments.

Bukele argued that when citizens send home money from abroad, they pay high transaction charges, and almost 70 percent of people do not even have a bank account. Bitcoin solves both these problems as transactions do not require banks, and it is both fast and cheap. According to Bukele, the Salvadorans will save $400 million per year in transaction fees.

Another factor that led to the quick acceptance of Bitcoin in El Salvador was the experiment of El Zonte, a beach town in the island nation. An anonymous American donor is believed to have donated about $100,000 in the form of Bitcoin to an NGO in El Zonte. The NGO actively promoted Bitcoin in the community and urged residents to start saving their money in the form of Bitcoins.

As the value of Bitcoin grew over time, the people who had saved their money in cryptocurrency saw massive gains in their savings. This not only helped the residents to earn money but also attracted businesses from other countries to start their business in El Zonte, a.k.a. the bitcoin beach. This upsurge in the usage of Bitcoin in one coastal community of El Salvador gave a boost to the acceptance of the cryptocurrency across the Central American nation.

El Salvador currently has about $22 million invested in Bitcoin. According to Nayib Bukele, around 2.1 million Salvadorans use the Chivo app regularly. Chivo is a digital wallet that is backed by the government of El Salvador and can be used to transact in Bitcoin.

The extensive use of Bitcoin has raised the issue of excessive power consumption by the country. But El Salvador otherwise imports a margin of its energy needs from its neighbors, mined 0.00599179 bitcoin worth about $269 in October with power harnessed from a volcano, in a first for the country. Around the same time, Bukele had also announced in a tweet that the mining project was still a work in progress and the country was in the process of “testing and installing” new mining equipment.