El Salvador becomes first country to adopt bitcoin as national currency
Premium
7 min read . Updated: 07 Sep 2021, 06:02 PM IST - Crypto advocates prepare for ‘B-Day’ as the government rolls out bitcoin ATMs, an e-wallet and stylish kiosks
Home >Markets >Cryptocurrency >El Salvador becomes first country to adopt bitcoin as national currency
Premium 7 min read . Updated: 07 Sep 2021, 06:02 PM IST El Salvador—Tuesday is B-day, or Bitcoin-day, in El Salvador.
The tiny and impoverished Central American nation became the first country in the world to adopt bitcoin as legal tender on Tuesday, allowing Salvadorans to use the cryptocurrency to buy a cup of coffee, get a haircut or even pay taxes and home loans.
To get them started, the administration of 40-year-old El Salvador President Nayib Bukele will spend more than $225 million. The plan includes a $30 credit in bitcoin to those who take up Chivo, slang for “cool," a government-run e-wallet that can be used for purchases in bitcoin or U.S. dollars.
The government is also rolling out a network of 200 bitcoin ATMs and building a chain of stylish, Chivo-brand kiosks with staff who will introduce consumers to bitcoin at plazas around the country.
The launch got off to a bumpy start online early Tuesday. The government-run Chivo wallet didn’t show up on major app stores hosted by Apple Inc. and Alphabet Inc.’s Google at midnight local time. It appeared on Huawei’s app store around 2 a.m. local time.
Bitcoin enthusiasts around the world showed their support for El Salvador on Tuesday by buying $30 worth of bitcoin. Bitcoin’s value edged 1% lower from its 5 p.m. ET level Monday to $51,350.
“We call it B-Day, because we are very eager to see how the ecosystem develops," said José Luis Guillén, founder of Coincaex, a Central American foreign-exchange platform to buy and sell bitcoin or U.S. dollars. Coincaex aims to be among the first foreign bitcoin service providers to get a license from the central bank.
Its adoption will be closely monitored by crypto advocates, global financial institutions and governments around the world.
“It’s a pretty monumental step in the evolution of bitcoin," said Garrick Hileman, head of research at Blockchain.com, one of the world’s largest cryptocurrency transactions firms.
The stakes are high for an indebted country of 6.5 million. Economists say that bitcoin’s sharp fluctuations risk denting tax revenue and foreign currency reserves of a government that has neither the policy tools nor the financial firepower to contain a speculative attack.
“The government is betting more than $200 million in a virtual casino, and that’s taxpayer money," said Ricardo Castañeda, senior economist at the Central American Institute for Fiscal Studies, a think tank.
The Bukele administration has also shrugged off warnings from creditors such as the International Monetary Fund, which advised against the adoption of privately issued tokens that bypass authorities and open doors to illicit transactions.
Government officials say bitcoin’s adoption will lead to affordable financial services in a country where an estimated 70% of the workforce operates in a vast underground, cash-based economy.
Many business owners like the government’s initiative because it widens payment options for clients with an easy-to-use mobile app that eliminates costs such as the credit-card fees that banks charge to merchants.
“My mother believes that bitcoin is a thing of the devil, but bitcoin has a lot of advantages," said Fernando Alvarenga, whose family-owned business manufactures metal bed frames and industrial griddles for making pupusas, El Salvador’s popular thick corn tortillas. Mr. Alvarenga sees the use of bitcoin as another step toward financial innovation and diversification following the country’s adoption of the U.S. dollar as national currency in 2001.
MINT PREMIUM
See All
The bitcoin plan took Salvadorans by surprise when it was first unveiled in June. U.S. crypto entrepreneur Jack Mallers, wearing a baggy hoodie and baseball cap, presented the initiative at a conference in Miami under the title: “One Small Step for bitcoin, One Giant Leap for Mankind."
Mr. Mallers opened the floor to a video recording in English by Mr. Bukele, an articulate businessman known for his leather jackets and baseball caps who was elected in 2019 as a political outsider by voters tired of rampant violence and poverty.
“Great ideas are beautiful and have great power," Mr. Bukele said. An ecstatic crowd stood and applauded as Mr. Bukele announced he would send a bill to the National Assembly to make bitcoin legal tender in El Salvador. The three-page bill was summarily passed a few days later.
Jorge Hasbún, who owns clothing stores and heads El Salvador’s Chamber of Commerce and Industry, said he was startled when he heard about the announcement. The initiative was rushed through without consulting stakeholders or the private sector, and regulations that were disclosed at the last minute have been insufficient, he added.
“If a client comes to pay with bitcoin, I’m not ready," Mr. Hasbún said. “We could have ridden the wave in a positive way, but the way the law was imposed wasn’t positive."
Some Salvadorans got their first taste of bitcoin several years ago in El Zonte, a fishing village on the Pacific coast that became a magnet for foreign surfers because of its steady stream of waves.
Its 3,600 residents began to embrace bitcoin in 2018 with the support of U.S. donors through the development of Bitcoin Beach, a local e-wallet that now has 35,000 users across the country. Hope House, a local charity group, began to use the cryptocurrency to pay for social endeavors such as school tutoring and beach-lifeguard employment programs.
Once word got out, the use of bitcoin spread through town from mom-and-pop stores to slick espresso bars, said Jorge Valenzuela, one of Hope House’s founders.
“We have changed the narrative about El Salvador, from being a dangerous country to a nation of crypto assets," he said.
The official use of bitcoin comes as Mr. Bukele faces increasing economic headwinds, a widening budget gap and limited access to debt markets. Diplomatic ties with the Biden administration have been strained as international organizations have accused Mr. Bukele of taking authoritarian control of the country.
Mr. Bukele’s ruling party legislators fired all members of the country’s top court in May. The newly appointed judges ruled late Friday that the president can serve two consecutive terms, allowing Mr. Bukele to stand for reelection. The U.S. Embassy in El Salvador said the ruling violated the country’s constitutional ban on immediate reelection.
Although Mr. Bukele has one of the highest approval ratings among Latin American presidents, his bitcoin initiative is highly unpopular. More than 65% of Salvadorans don’t want the government to spend taxpayer money on its adoption, and 80% have little or no confidence in bitcoin, according to a poll released by El Salvador’s UCA university earlier this month.
El Salvador’s International Truckers Association said in August that mandating businesses to accept bitcoin curtailed economic freedom.
In a sign of how the bitcoin issue has made for strange bedfellows, hundreds of veterans of the country’s civil war—retired soldiers and former guerrilla fighters from the conflict that left more than 75,000 people dead in the 1980s—demonstrated together last month in front of El Salvador’s Finance Ministry to demand pension benefits and assurances that payments won’t be denominated in bitcoin.
“Bitcoin is for countries with more advanced technology and stronger economies," said José Alberto Amaya, a 56-year-old who served in the Army’s special forces and rapid reaction brigades.
“It’s a wild economic adventure," said Juan Manuel Pineda, a former Marxist guerrilla who served as an explosives expert in the Farabundo Martí Liberation Front. “How are we going to use bitcoin if we don’t even have a smartphone or the money to have internet access?"
Even some crypto advocates are reluctant to use the state-run Chivo e-wallet because of privacy concerns.
“You hand over all your data to the government, your financial movements, what goes out and what goes in," said Oswaldo Serrano, owner of Smart Pet SV, an online pet-food delivery service. “But I do hope that people spend those $30 given by the government on pet food."
There are security risks because the funds held in the Chivo wallet are controlled by the government on behalf of its citizens. Such fund centralization risks attracting hackers, notes Mr. Hileman of Blockchain.com.
Financial service companies, which are the main channel for the $6 billion in remittances that El Salvador receives each year from migrants living in the U.S., will accept payments in bitcoin, but the funds will be immediately converted into dollars.
Their top concern will be how to prevent federally regulated banks in the U.S., which provide financial services to banks in El Salvador, from cutting ties because of due diligence and compliance risks, executives say.
“Because El Salvador will have two currencies, the question becomes will the bitcoin ecosystem get its U.S. dollars through El Salvador and will the U.S. be OK with that?" said Caitlin Long, chief executive officer of Avanti Bank, which provides cryptocurrency services for institutional investors.
This story has been published from a wire agency feed without modifications to the text
Never miss a story! Stay connected and informed with Mint. Download our App Now!!
×![]()