On June 5th, 2021 the government of El Salvador, guided by the President Naiyb Bukele, announced the adoption of the Bitcoin as a legal tender. Following the announcement, on September 7th 2021 the small Central American nation became the first economy to use Bitcoin as currency, with the same power of Dollars. President Bukele proposes many advantages from the adoption, but the country has recently shown its aversion towards the reform, with the chamber of commerce estimating 93% of the population opposing it. While protests go on, the International Organizations are uncertain and the financial world is still looking at cryptocurrencies with the “wait and see” approach, the question regarding the future of Bitcoin as a legal tender has never been so open.
El Salvador is a developing country in Central America which sees a massive emigration to richer countries, mostly the US. For this reason its economy relies heavily on remittances, which accounts for 24% of its GDP (World Bank). Many fathers are constantly transferring money back to their families in the country, but this process is not as easy as in Western countries. In fact, 70% of the population still lacks access to a stable financial system, making money transfers the only possible way to receive remittances from abroad. The transactions are not desirable nor comfortable for three main reasons: families must travel a long way to reach the closest money transfer point; transaction costs account for almost 30 – 40 % of the amount sent; many criminal groups preside over money transfers and know when cash is coming in the country.
In this scenario, remittances are costly and dangerous. Bitcoin is overcoming all this process. By using a simple app in every smartphone money can be exchanged immediately, with an insignificant transaction cost and safely. President Bukele undoubtedly thought about the enormous advantages Bitcoin could have brought to his country, and declared it as a legal tender, obliging all kinds of businesses to accept it starting from September 7th 2021.
Despite all the potential advantages highlighted by the government, thousands of people reversed on the streets to protest against the adoption of the cryptocurrency as soon as the new law came into force. On the 200th anniversary of the country’s independence, public squares were full of placards reading “No to Bitcoin” and “Respect the Constitution”. The two slogans explain the main problems El Salvador is concerned with nowadays: the fear for the new currency and the everyday more authoritarian direction its government is taking. As for the first, people fear Bitcoin can bring inflation and instability to the country. In fact, the currency is decentralized, its value is determined by supply and demand of all the users, and there is not a central bank controlling the situation when it gets hot. Moreover, a big part of the population lacks access to the internet or may even lack a cell phone, making the transfer of money via cryptocurrencies impossible. As for the second, people are protesting against the excessive centralization of power in the hands of its President Bukele, who forced the decision to adopt Bitcoin. In addition, he recently removed all five judges from the constitutional chamber of the Supreme Court in order to run for president again.
Looking at the international level, different actors are reticent. In fact, the IMF has been warning El Salvador that the decision could have brought “macroeconomic, financial and legal issues that require very careful analysis”. Moreover, the World Bank rejected a request from the government to help with the implementation of the Bitcoin as a legal tender due to “environmental and transparency shortcomings”. If international actors are worried about the developments of the adoption, the financial world is divided in supporters and opposers. Thus, while many investors are exploiting the enormous potential of cryptocurrencies, many of them are still in the “wait and see” approach, given the high volatility of the system.
The experiment of El Salvador is still in process, and uncertainty is rising more and more. The highly volatile cryptocurrency can boost or result in a failure depending on the results of this experiment. While Panama and other countries are thinking about following El Salvador’s action, international organizations continue to warn countries about the implications of their decisions. Will we experience financial freedom again? It seems the only thing to do is wait and see.