Buying the Dip: El Salvador Makes Bitcoin Legal Tender

ANNOUNCING A HISTORIC MONETARY DECISION DURING A BITCOIN CONFERENCE
El Salvador has long been affected by insecurity and gang violence. After the Covid-19 pandemic, the country has dealt with an economic contraction, a large fiscal deficit, and a high debt burden. There are also increasing concerns about president Nayib Bukele’s dismantling of democratic institutions and fraught negotiations with the IMF for a $1.3 billion loan agreement.

The U.S. dollar has been El Salvador’s national currency since January 1, 2001. On June 6, 2021, President Bukele announced the country would adopt bitcoin as legal tender in a pre-recorded address in English for the Bitcoin 2021 conference in Miami.

Bukele’s decision caught Salvadorans by surprise. Until then, El Salvador’s main crypto experiment had been Bitcoin Beach, a pilot in the Pacific surf town of El Zonte. Some businesses accepted payments in crypto, and 2 ATMs allowed users to convert bitcoin to U.S. dollars.

A BITCOIN ENTREPRENEUR WRITES THE BITCOIN LAW
Crypto evangelist Brock Pierce has been in contact with officers in the Bukele administration since June. Jack Mallers, founder of the bitcoin payment platform Strike, helped write the Bitcoin Law. The Salvadorean Assembly rubber-stamped the 3-page legislation on June 9, 2021.

The Bitcoin Law mandates that “all economic agents must accept bitcoin as a means of payment” (art. 7) except for “those who have no access to the necessary technology” (art. 12). The law also establishes that “taxes cam be paid in bitcoin” (art. 4). However, the U.S. dollar remains the country’s “accounting reference unit” (art. 6). “Continuing to use USD as a parallel currency is sensible, especially as many Salvadoreans use physical cash, but it could delay business adoption of BTC [bitcoin],” tweeted banking and finance commentator Frances Coppola.

NO POPULAR BUY-IN
The law passed amid strident opposition:

A poll from Universidad Centroamericana José Simeón Canas found that 95.9% of respondents said bitcoin usage should be voluntary, 82.8% said they had little or no trust in bitcoin, 67.9% disapproved of the Bitcoin Law, and 66.7% said the Assembly should repeal it.
A survey by the country’s Chamber of Commerce and Industry found that 96% of business owners did not want to be obliged to accept bitcoin in payments, and 77% reported they would only use U.S. dollars.
A poll by Universidad Francisco Gavidia shows that 52.1% of Salvadoreans disagreed about using bitcoin in payments, and 43.6% said it would worsen the country’s economic situation.
A poll by LPG Datos found that 65% of the population disapproved of using bitcoin as legal tender, and 72% said they wouldn’t receive bitcoin as a payment instrument. Women, the elderly, and people with low-income levels had the highest rejection rates.
There was barely any discussion about the law and its implementation:

“[The adoption of] bitcoin was a very big economic decision, and it was done totally illogically, sent to congress and passed the same day. We are going through a profound fiscal crisis with high cost of living and the government’s response, instead of serious economic policy, is to adopt Bitcoin as legal tender,” said opposition assembly member Claudia Ortiz.
The Bukele government was “preparing more of a brand or product launch than public policy,” said Leonor Selva, executive director of the National Association of Private Firms (ANEP).
“We don’t know anything about bitcoin. The president did not explain anything; he didn’t ask if we wanted it. I would have said no. How can I accept it, if I know nothing about it? As sellers, we are very frustrated,” said merchant Elba Santos.
“We all understand that cryptocurrency is the future, but you can’t foster it by forcing everyone to use it,” said Jorge Hasbún, head of El Salvador’s Chamber of Commerce.
FINANCIAL EXCLUSION IN EL SALVADOR
The Bukele administration argues that Bitcoin might help lower the cost of receiving remittances. In 2020, remittances reached 24.1% of El Salvador’s GDP. Kiara Hueso, a 27-year-old beauty products saleswoman, said it had been “easier and faster” to withdraw $75 sent by her father in the United States – after two days of trying.

Douglas Rodriguez, president of the Reserve Bank of El Salvador, said, “We don’t see any risks [with bitcoin]. Perhaps, upside risks. [Bitcoin will] become a payment system, a system for financial inclusion […] For us, Bitcoin is simply a payment method.”

In 2017, only 30.4% of Salvadoreans had a bank account. That year, only 18.9% of the population had a debit card, and 5.7% had a credit card. In 2019, nearly 22.8% of households lived below the poverty line. In 2020, 59% of adult Salvadoreans had internet access. However, more than 90% of rural households have no internet access, according to a 2020 report from the Interamerican Development Bank and Microsoft.

German Martínez, a 61-year-old Uber driver, said that Bitcoin is “like credit cards. We got used to using plastic, and now we need to start using crypto. The world has to evolve.” However, having a digital wallet is not an option for all.

“We live day to day with whatever coins I get. That dough [bitcoin] is only going to make us poorer. If we can’t afford a smartphone, bitcoin is not for people like us, the poorest,” said Francisca Rivas, a 75-year-old street seller in San Salvador who makes less than $100 a month.
“In my country, there are a lot of people who cannot read, and barely has a cellphone, not a smartphone, but an old phone. They are not going to use bitcoin,” said Jeanette Sandoval, 70.
“The truth is that here as the poor people that we are, we don’t understand [bitcoin]. I’m worried,” said José López, 81, a shoe shiner in San Salvador.
B IS FOR BITCOIN, B IS FOR BUKELE, B IS FOR BIG BROTHER
Critics are shocked by the Bitcoin community’s cavalier disregard concerning president Bukele’s authoritarianism and the potential misuse of the Chivo wallet for state surveillance and other nefarious purposes.

“Bitcoin’s spirit when it was designed was to not let governments intervene, so why is the government of El Salvador using it? It’s like handling over your phone to the state intelligence agency,” said Roberto Dubon, a digital activist concerned about potential data misuses.
Bitcoin fans “should reflect about what kind of government they are really supporting. This is an authoritarian government that has orchestrated coups, which has negotiated with gangs, which has co-opted the armed forces and the police. It is a very peculiar government,” said Salvadoran economist Tatiana Marroquín. “It seems that for them El Salvador is just a tool to promote their cryptocurrency. El Salvador isn’t just a means to an end – for us, El Salvador is the end,” added Marroquín.
“The same technology of freedom could become part of a new technological dystopia,” said Lane Rettig, entrepreneur and former senior programmer at the Ethereum Foundation.
“What Bukele is doing is not bitcoin, but a centralized, state-run banking system. It is the antithesis of the principles of bitcoin champions,” said Mario Gómez, a computer scientist, and critic of Bukele’s bitcoin policy who was briefly arrested on September 1.

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