Hot takes on El Salvador’s Bitcoin ploy are plenty, but a small Central American country adopting the crypto as legal tender is a big deal. So bear with us, there’s lots to unpack.
Let’s start with the basics. El Salvador, of similar size and population to Massachusetts, lies on the Ring of Fire (a string of tectonic plates that causes active volcanoes and large earthquakes) nestled between the much larger Guatemala and Honduras.
It’s a very religious nation — like much of the Spanish-speaking world — with three-quarters of the population describing themselves as Catholics or Protestants.
El Salvador’s history is pocked by economic instability, coup d’etats, foreign meddling, civil strife, gang violence, drug trafficking, and authoritarian rulers. The country’s citizens want to change all that.
But what’s caught the eye (and ire) of some is current president Nayib Bukele’s decision to adopt Bitcoin as legal tender.
And with Bukele so goes the nation: the leader’s 90 to 95% public approval rating and willingness to adopt unorthodox methods to pass legislation means the Bitcoin proposal has already become law, regardless of critiques and criticisms — and there’s many.
However, before considering possible benefits and pitfalls of Bukele’s decision, it’s important to understand exactly what legal tender is.
‘Economic agents’ must accept Bitcoin
Using the US’ definition (the most widely accepted), legal tender is a note or coin that must be accepted by federal governmental agencies to pay off debt.
These include Federal Reserve notes, United States Notes, and federally minted coins. But private businesses, state governments, and individuals are noticeably absent from the US’ definition.
So, this is where El Salvador’s implementation of legal tender seems to have gone astray. As pointed out by journalist and researcher J.P. Koning, the introduction of Bitcoin demands “every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service.”
Bukele’s Bitcoin law is far more coercive than the traditional definition of legal tender. There’s exceptions: Article 12 states merchants don’t have to accept Bitcoin if they don’t have the means, but the rule also implies forced training to accept Bitcoin payments.
Many within the Bitcoin community see this as a step in the wrong direction. Unfortunately for Bukele, so do many Salvadorans, with 96% of those polled recently stating they’d prefer the crypto be optional.
But what Salvadorans want is neither here nor there at this point.
Cellphones are widespread in El Salvador (with over one cellphone per person). Although, internet usage is comparably low in the country, at 60% as of 2019.
On the upside, 100% of Salvadorans have now finally received electricity. All this suggests incorporating Bitcoin as legal tender — or in El Salvador’s case, forced money — is more difficult than flipping a switch.
Why El Salvador wants Bitcoin
One can go all the way back to the 1930s to see authoritarianism and foreign meddling in El Salvador, but we’ll start with the 1980-1992 Civil War.
The Salvadoran Civil War (like most “civil wars” of the 1980s and early 1990s) was a proxy war between the US and its communist enemies and had very little to do with the desires of Salvadorans.
The violent and dictatorial regime of the time was supported by the US, which sent guns, supplies, and money in the hope that uprisings would be quashed.
Meanwhile, rebels Farabundo Martí National Liberation Front (FMLN) were supported by Cuba, the USSR, and other countries.
The warfare and violence continued even after a 1992 peace treaty (noticeably just as the Cold War came to an end). Steady emigration out of El Salvador then forced a multi-decade “brain drain” that impacts the country to this day.
Simultaneously, the US began to ship gang members from MS-13 (one of the biggest and most violent gangs in the world) regularly back home to El Salvador.
This was despite the nation’s lack of prisons and infrastructure to handle the uptrend in criminal activity.
At this point in its history, El Salvador suffered from yearly double digit inflation, chaos on the streets of the capital San Salvador, political instability, and a trade deficit.
With these factors in place, El Salvador’s currency, the Colón — in place since 1892 — began its final tailspin in the late ‘90s and early ‘00s. So, the leadership did something drastic: it dollarized.
Starting on January 1, 2001, El Salvador began swapping citizens’ Colóns over several years, slowly morphing the economy into one entirely dependent on utilizing and trading with US dollars.
What is dollarization?
Dollarization is shorthand for the use of any foreign currency by another country.
- The International Monetary Fund (IMF) labels dollarization “nearly irreversible.”
- It generally occurs when a country is in the midst of strong multi-year inflation or hyperinflation.
- Dollarization compels monetary stability.
The price of dollarization is twofold. On one hand, it stabilizes inflation woes and the ability to transact. But it also leaves El Salvador without a “lender of last resort” — a central bank that can alleviate economic concerns.
And while the trade deficit remains, remittances from Salvadorans in the US offsets that deficit in most years (personal remittances make up around 21% of El Salvador’s GDP).
That’s how we get to where we are today: a new, well-liked leader in Bukele doing what many citizens in democracies around the world would call autocratic political maneuvering.
Bukele is, more or less, forcing Bitcoin onto his citizenry. And not even a strict Bitcoin policy — but rather a program based on a relatively centralized crypto app in Strike’s Zap.
Bukele’s Bitcoin program:
- Utilizes Layer 2 Bitcoin as opposed to on-chain transactions.
- Settles payments into dollars via infamous stablecoin Tether (USDT).
- Is centrally administered by the El Salvadoran government.
There’s still additional concerns. Financial commentator Frances Coppola pointed out there’s only two Bitcoin ATMs to allow Salvadorans to cash out their crypto for tangible currency.
Two Bitcoin ATMs in a country of six million people. The US plays host to over 30,000, for comparison, although the nation is much bigger.
But to be fair to Bukele, bringing in more Bitcoin ATMs likely won’t be too difficult, especially considering how excited the Bitcoin community is by this announcement.
Additionally, the ability to mine Bitcoin with geothermal energy has spurred El Salvador’s political elite to acknowledge the money to be made by boosting related infrastructure (the country is dotted with 23 active volcanoes).
El Salvador adopting Bitcoin is not our debate
The truth is, no one knows what any of this means just yet.
Bukele is only two years into a five-year term and El Salvador presidents can’t serve consecutively — which means he can’t be re-elected unless he sits out the next vote.
If Bukele were to alter this aspect of the constitution there may be more reasons to worry.
But the citizens of El Salvador have, so far, approved of Bukele’s drastic and intense measures, even if onlookers think his harsh views on abortion, incendiary acts to force legislation, and uncomforting charisma resemble a dictator-in-the-making.
Still, Coppola told Protos that while de-dollarization would be incredibly difficult (and without precedent), the process could be a great move for a country like El Salvador.
“El Salvador doesn’t have much in the way of reserves, so it’s very hard for them to provide liquidity for the economy and they can, literally, run out of money,” said Coppola. “So Bitcoin is a reserve diversification strategy because he wants to earn more money from them.”
“I have a little bit of sympathy for him because he earns absolutely nothing on US treasuries or on dollars,” she added.
In the meantime, the world remains unsure of Bukele’s priorities.
But it’s simply not the West’s prerogative to decide what’s acceptable for the Salvadoran people. No doubt, they’ve had enough of that.
Update 09:56 UTC, June 19: Since this was published, reports of the Bitcoin payment platform utilized by Bukele in El Salvador phasing Tether out have surfaced. Clarified 96% figure in paragraph 12 relates to those recently polled by the country’s Chamber of Commerce and Industry.