On June 5, 2021, El Salvador President Nayib Bukele announced via live broadcast to the attendees of the Bitcoin Conference in Miami, and subsequently the world, his plans to push forward legislation to have his country adopt Bitcoin as legal tender. His promise was quickly fulfilled early the following week when that legislation was approved by the El Salvadoran congress via supermajority, making El Salvador officially the first country to legally adopt the cryptocurrency. This move will allow for prices to be denominated in BTC and tax contributions to be made using the digital currency. The announcement is included among a global movement to validate Bitcoin’s capacity to fulfill everyday use cases.
El Salvador is a prime candidate for Bitcoin use
The Latin American country is notably underbanked, with only about 30% of citizens possessing a bank account and only 17% stating they borrow from banks. In addition, 20% of the El Salvadoran GDP comes from remittance payments, with the third parties fulfilling those transactions taking a hefty cut. The growing theme of Bitcoin usage in the country was amplified in March when the mobile payments app, Strike, which runs on Bitcoin’s lightning network, was launched in the country and quickly became its most downloaded app. El Salvador doesn’t even technically have a national currency. The US dollar is the country’s primarily used currency, now joined by Bitcoin.
El Salvador’s crypto vision
Nic Carter, a partner of Castle Island Ventures and one of the larger voices in the crypto sphere, took to Twitter Spaces to delve into the recent developments revolving around El Salvador’s announced Bitcoin adoption. Unbeknownst to him or the audience, the man behind it all, Bukele, would join, giving everyone a great picture of his Bitcoin vision. In the talk, the president described Bitcoin’s importance and drove home one crucial point about the adoption: it is mandatory that all merchants accept it. A point reaffirmed by Article 7 of the recently passed law:
“Every economic agent must accept bitcoin as payment when offered to him[/her] by whoever acquires a good or service.”
This means that in less than three months if you were to visit El Salvador, the smallest country in Latin America, every bodega, barber, tamale stand, even bank that you encounter will be required to accept your internet money.
El Salvador can expect to face numerous challenges on its journey, the first of which is technical implementation. For this, they will partner with Strike to establish a government wallet for their merchants. Merchants will have the option to use the government-sponsored wallet, but it is not required as they are free to use any wallet provider that they choose.
Another prevalent issue is the need for a smart device (phone, tablet, etc.) for merchants to accept the payment in Bitcoin, not to mention an internet connection, and, of course, power — all things a significant portion of the population lack.
Besides the technical and physical requirements, there is a requirement for the population to be brought up to speed on how to use Bitcoin and the technology behind it, which should not be forgotten when assessing the challenges a nationwide Bitcoin obligation will face.
Now there is some leeway in this obligation laid out in Article 7 coming from Articles 8 and 12 of the same law. Article 12 provides an exemption to merchants who lack the technology to transact in Bitcoin, meaning the police will not be called in if a tamale stand happens to only take cash. However, Article 8 assures that if merchants lack the required technology to transact in Bitcoin the state will provide it … so on second thought, maybe they will.
Besides prepping their people for B-Day, the country needs to straighten a few things out in regards to mining. Their answer? Volcanoes.
El Salvador is not free from the much-maligned criticization of the energy consumption required to mine Bitcoin. To work, the country will need state-sponsored Bitcoin mining, and further, electricity to power the computers mining said Bitcoin. To get it, the country will tap into an innovative process of obtaining geothermal electricity from volcanoes. The El Salvadoran president tweeted that he instructed the state-sponsored geothermal energy company to provide Bitcoin mining facilities with the energy.
Unfortunately for El Salvador, the World Bank isn’t buying it. President Bukele approached them asking for assistance with its Bitcoin implementation and was rejected by the bank citing concerns over environmental and transparency shortcomings.
This goes against the widely adopted use case for Bitcoin
In the early 2010s, El Salvador’s move would make much more sense as Bitcoin was initially dreamed up to be the idyllic decentralized currency of the internet. However, over the last decade, the narrative has evolved to place Bitcoin as an inflation-resistant hedge against suspect economic policy more akin to digital gold than a digital dollar. Part of this has to do with the massive volatility involved. El Salvador does place some safeguards to protect merchants from negative effects associated with Bitcoin’s volatility, namely a state trust that will provide Bitcoin/USD liquidity that allows the merchants to quickly exchange their Bitcoin for U.S. dollars.
While the forced obligation of Bitcoin acceptance somewhat goes against the romanticized anti-authoritarian purpose of the digital currency, El Salvador’s adoption will prove to be a fascinating experiment if nothing else. More than a decade removed from its inception, we will now see a Bitcoin-based economy in practice. The allure of a nation in the midst of utopian crypto grandeur will almost certainly be filled with growing pains as this small Latin American nation traverses a road that no one has before. In a crazy world, El Salvador has the apparent best intentions of using this new financial tool to improve the lives of its citizens.
I will leave you this quote from podcaster and MIT research scientist Lex Fridman:
“Cryptocurrency is much bigger than a few Americans looking to make a quick buck through meme-driven speculation. It is a technology that enables freedom from oppression, from suffering in the world, because money is power.”