Bitcoin in El Salvador: A New Era of Digital Currencies as Legal Tender
By Alan Jurcak
Much to the surprise (and chagrin) of many in geopolitical and international financial spheres, El Salvador announced in June of 2021 that the nation’s vendors would now accept payments of Bitcoin as legal tender, an announcement that came into effect on September 7th, 2021.[1] The reasoning behind El Salvador’s decision was not clear to all at first, but the small Central American nation has recently struggled with issues surrounding its adoption of the U.S. dollar as its primary legal tender in 2001.[2] Following a period of civil war during the 1980’s and early 1990’s, El Salvador added the U.S. dollar as a form of legal tender to both stabilize its waning economy and promote future growth through tourism and trade, and eventually phased out printing of its other currency, the colón, altogether.[3] However, this switch to the dollar has not borne the best of outcomes for El Salvador.
Remittance payments into the nation from El Salvador citizens living in the United States make up a large share of El Salvador’s gross domestic product, yet money transfer fees through typical institutions like Western Union often incur high transfer fees, and large transfers over $10,000 require reporting to the IRS.[4] But this is where Bitcoin comes into the picture. By utilizing features such as the tipping feature through Bitcoin’s Lightning Network,[5] and money transfers through the government-sponsored digital wallet Chivo,[6] El Salvadorans sending remittance payments into the country would no longer face exorbitant fee charges that can eat up a large share of the payment before it reaches its destination. The adoption of Bitcoin was also seen as a step towards providing banking services to the nearly 70 percent of El Salvadorans that do not have access to a traditional bank account.[7] Though this move serves dually as a step away from its dependence on the U.S. dollar and an investment opportunity for the Treasury of El Salvador and its citizens, the adoption efforts did not get off to the meteoric start that many promoting the adoption were hoping for.
Whether it was the mere gusto of its recently elected and forward-thinking President Nayib Bukele, or a calculated business move to capture the fanfare surrounding cryptocurrencies and address the loss of revenue from money transfer fees, the citizenry is now forced to endure the unfortunate growing pains of its quick adoption. Chivo experienced numerous service issues on launch, including downed servers that froze access to payment and transfer networks, and its “Bitcoin ATMs” quickly ran out of currency to dispense to customers.[8] Many problems have persisted with Chivo following launch, including identity verification issues that locked citizens out of their wallets, ATM withdrawal and bank transfer failures, slow response times, and the system even mistakenly sent verification codes to the wrong phone numbers.[9] Additionally, the price of Bitcoin crashed by over $10,000 per coin on launch day, September 7th, after news of the SEC issuing a warning to Coinbase, and citizens were forced to watch their newfound Bitcoin holdings wane in value immediately.[10]
Aside from these tumultuous early days, President Bukele and his nation’s efforts to “modernize” their monetary systems have begun to show dividends and will prove to be a vital proving ground for the further adoption of digital assets. Though the issue of Bitcoin’s volatility will persist for the foreseeable future, Chivo is currently used by more than 3 million citizens, and, on average, nearly $2 million in remittance payments to El Salvador are made each day using the Chivo wallet.[11] Chivo also processes an impressive 65,000 transactions per second on average, showing some popularity among El Salvadorans.[12] President Bukele also announced in November his plans to begin construction on a “Bitcoin City” in the hopes of driving tourism and crypto-savvy investment into public infrastructure.[13]
Beyond the grandeur of Bitcoin and its enthusiastic community of supporters, these ambitions are exceptionally lofty for a nation of El Salvador’s size, and the adoption of Bitcoin could be fairly seen essentially as a gamble on the value of digital assets that have so often proven to be volatile. But as the prospect of Bitcoin’s employment as a reserve currency or legal tender is floated around in many countries, El Salvador will serve as our best chance at forecasting the consequences of a transition towards digital financial systems and the issues that attorneys may one day find themselves tackling.
[1] Cagri Kumru, 2021 in Review: El Salvador’s Bitcoin Experiment, Australian Institute of International Affairs (Dec. 20, 2021), https://www.internationalaffairs.org.au/australianoutlook/el-salvadors-bitcoin-experiment/.
[2] James Chen, SVC (El Salvador Colón), Investopedia (Nov. 5, 2020), https://www.investopedia.com/terms/forex/s/svc-el-salvador-colon.asp
[3] Id. (noting additionally that the colón remains in circulation despite the discontinuance of printing); see also Kumru, supra note 1.
[4] Kumru, supra note 1.
[5] Esther Crawford, Bringing Tips to Everyone, Twitter (Sep. 23, 2021), https://blog.twitter.com/en_us/topics/product/2021/bringing-tips-to-everyone.
[6] Price Waterhouse Cooper, El Salvador’s Law: A Meaningful Test for Bitcoin, 6 (Oct. 2021), https://www.pwc.com/gx/en/financial-services/pdf/el-salvadors-law-a-meaningful-test-for-bitcoin.pdf.
[7] Id. at 3.
[8] David Gerard, El Salvador’s Bitcoin Law is a Farce, Foreign Policy (Sep. 17, 2021), https://foreignpolicy.com/2021/09/17/el-salvador-bitcoin-law-farce/.
[9] Id.
[10] Id.
[11] Price Waterhouse Cooper, supra note 6 at 10.
[12] See Id.; but see Gerard, supra note 8 (noting that many El Salvadorans have protested the adoption of Bitcoin and argues that Chivo is unpopular among the general population).
[13] Nelson Renteria, El Salvador Plans First 'Bitcoin City', Backed by Bitcoin Bonds, Reuters (Nov. 22, 2021), https://www.reuters.com/markets/rates-bonds/el-salvador-plans-first-bitcoin-city-backed-by-bitcoin-bonds-2021-11-21/.