El Salvador’s Bitcoin Experiment: How Does It Work?

Back in 2021, El Salvador became the first country to do so adopt Bitcoin as official legal tender. It was a turning point, with many people either praising or condemning the move. Recently, governments have cracked down on Bitcoin. And the current political climate, in the US and elsewhere, could have a huge impact on how we talk about El Salvador and the cryptocurrencies it adopted.

Since El Salvador is so closely intertwined with the United States politically and economically, any changes in these arenas could have an enormous effect. It will be interesting to see how El Salvador’s decision pays off, and whether other countries follow suit.

El Salvador’s bold move

El Salvador struck when it adopted Bitcoin as its official currency. The unprecedented decision will benefit many of the citizens.

According to PwC, around 70% of the population in El Salvador lack access to a bank account. On the other hand, there are 9.94 million mobile phone connections in the country, or among 156.5% of the population. Therefore, switching to a money system that only needs a smartphone app to work can be very beneficial.

In addition, remittances account for over 20% of the country’s GDP, according to the World Economic Forum. Given how much money goes into international wire transfer fees, Bitcoin could be an attractive option.

El Salvador adopted Bitcoin as its national currency mainly to fight poverty and help unbanked citizens. The government hoped to improve economic opportunities for citizens, giving them access to digital currency through their smartphones. This will connect them to financial services that were not previously available. In addition, it will help to promote a more stable economy by reducing the inflation risk.

Moreover, the use of Bitcoin as a national currency can also curb money laundering and corruption, as the authorities can monitor transactions more easily. The use of Bitcoin can also attract foreign investment, further stimulating economic growth.

The current political environment

Unfortunately, since adopting bitcoin, El Salvador has plunged into political turmoil. At present there is instability in the government, conflicting interests among political parties and an uncertain economic future. Despite the instability and increase in gang-related violence in 2022, tourism has increased by 30%.

While new opportunities and better access to digital services are available, it is unclear whether they have caught on. El Salvador’s poverty rate remains at 26.6%, actually higher than before Bitcoin became legal tender. Central bank data shows that cryptocurrencies also make up less than 2% of foreign transfers. And any increase in GDP from tourism seems negligible at present.

Bitcoin’s volatility has also had far-reaching consequences. And these have been most jarring with the currency’s downward fluctuations. Bitcoin’s value has yet to return to the levels of September 2021 when El Salvador began buying in. The average price was around $45,000 per bitcoin, and the price has recently risen to around $28,000.

Potential conflicts of interest

Recent reporting in the Wall Street Journal noted that two key figures in the rise of Bitcoin in El Salvador, Max Keizer and Stacy Herbert, launched a popular financial news show on Russian state television. They claim to have cashed in on the crypto boom. Apparently, they are the founders of a crypto exchange that helps manage El Salvador’s government debt sale linked to Bitcoin. Additionally, they have become advisors to the Salvadoran government when it comes to adopting Bitcoin and investing in crypto ventures.

The couple first visited El Salvador in 2021 and appear to be heavily involved in cryptocurrency-related projects in the country. Their involvement entails a certain degree of conflict of interest. They have positioned themselves to benefit from their investments if El Salvador’s use of Bitcoin is successful.

This type of ethical conflict is not new to crypto. In fact, the lack of regulation worldwide is one of the reasons why governments are tackling it now. As more people use (and abuse) crypto and other investments, the more governments will have to take action. The question now is whether these laws will help or hurt the industry.

Regulation, Prohibition and the Future of Crypto

Several states in the US have proposed bans on crypto mining. The SEC has cracked down on many companies and individuals for actions they consider illegal. Furthermore, some politicians at the federal level have said they want to ban crypto altogether. If this hostility prevails, it can lead to innovation elsewhere. But whether El Salvador would be on the receiving end is hard to say.

Still, two years is not much time to expect full adoption of a currency that is still new. Most texts about cryptocurrency have not yet become available in Spanish. And knowledge about the asset and how it works often does not reach people with lower incomes, regardless of geography.

By 2022, 10,000 students learned about cryptocurrency and its many uses. This type of education, if continued, can strengthen adoption as young people begin to understand and use the technology.

Looking ahead as other countries weigh crypto

El Salvador is leading the way in cryptocurrency adoption, and its success (or failure) could have an overall impact on countries considering implementing a digital currency as legal tender. Looking at El Salvador’s future, it is clear that the political environment has played a role in how people talk about their national currency. Depending on how things play out from here, other countries may be encouraged (or discouraged) to implement their own cryptocurrency projects.

But with Bitcoin’s value on the rise and adoption underway, it may be too early to draw any conclusions.