In September 2021, El Salvador made history by becoming the first country in the world to adopt Bitcoin as legal tender, alongside the US dollar. This move, spearheaded by President Nayib Bukele, was announced as a way to boost the country’s economy, increase financial inclusion, and attract foreign investment.
Reasons for Adopting Bitcoin
El Salvador faces numerous economic challenges, including high levels of poverty, low financial inclusion, and a significant dependency on remittances sent by Salvadorans abroad. Adopting Bitcoin was seen as a potential solution to several of these issues:
- Financial Inclusion: Approximately 70% of the Salvadoran population does not have access to traditional banking services. With the use of Bitcoin and the digital wallet Chivo, the government hopes more citizens will participate in the financial system.
- Reduction of Remittance Costs: Remittances from Salvadorans abroad account for about 20% of the country’s GDP. Using Bitcoin can significantly reduce transfer fees, which are often high in traditional services.
- Attraction of Investments: By adopting Bitcoin, El Salvador aims to attract companies and entrepreneurs in the cryptocurrency space, transforming the country into a hub for technological innovation.
Implementation and Challenges
The implementation of Bitcoin as legal tender was not without challenges. There were concerns about Bitcoin’s price volatility, the country’s digital infrastructure, and public acceptance.
- Volatility: The highly volatile nature of Bitcoin creates economic uncertainties. In response, the government created a $150 million fund to ensure convertibility between Bitcoin and the dollar.
- Digital Infrastructure: The implementation required the creation of robust digital infrastructure. For this, the Chivo digital wallet was launched, allowing citizens to make Bitcoin transactions without fees.
- Public Acceptance: There was initial resistance from the population, with protests and skepticism about the effectiveness and security of Bitcoin. However, the government incentivized its use by offering $30 in Bitcoin to each Chivo user.
Impacts and Future
In the long term, the adoption of Bitcoin could transform El Salvador’s economy. Positive effects are already being observed, such as increased tourism and international interest in the country. However, success will depend on the government’s ability to manage the cryptocurrency’s volatility and ensure transaction security.