El Salvador & Bitcoin: Revolutionary lessons

El Salvador is a developing country with a population of around 6.5 million people. Around 70% of its inhabitants have no access to traditional financial services, which leads to financial exclusion and economic instability. The population is heavily dependent on expensive remittances from abroad, as many Salvadorans work abroad and send money back home. This process is often hampered by high fees and long transfer times. The country's economy suffers from high inflation and is heavily dependent on the US dollar, which was the sole national currency until the introduction of Bitcoin. This dependence on a foreign currency has made El Salvador vulnerable to external economic shocks and limited the country's financial autonomy.

When President Nayib Bukele took office in 2019, he saw cryptocurrency as an opportunity to break away from inflation and dependence on the dollar. As a proponent of innovation and technological advancement, he recognized the potential of cryptocurrencies such as Bitcoin to address the country's economic challenges. He also sought to promote financial inclusion and improve the population's access to low-cost financial services. The introduction of Bitcoin as an official currency was seen as a means to reduce the cost and bureaucracy of transferring money from abroad while strengthening the country's financial autonomy.

On September 7, 2021, the law was changed to Bitcoin as the official national currency. All companies were required to accept Bitcoin as a means of payment with immediate effect. To promote its use, every citizen was given bitcoins worth 30 dollars when downloading a special cryptocurrency app called "Chivo". Among other things, you could also use the Chivo app to buy gas at a lower price.

A bumpy start

What sounds convincing in theory, however, failed in part in reality. In fact, over half of households downloaded the Chivo app. However, over 60% of them only spent the free bitcoins and then made no further transactions. Even after almost two years, the number of active daily users is still rather small. It is estimated at 20% and is mainly limited to young, well-educated people, most of whom already had a bank account anyway and were not the target of the initiative.

Acceptance among merchants and companies also did not go as planned. One year after the introduction of the Bitcoin Act, only 20 percent of companies accepted Bitcoin as a means of payment. Even though this was stipulated in the law.

President Bukele has had to listen to a lot of criticism from his fellow countrymen. Particularly for forcing Bitcoin on them and not informing them sufficiently about the risks and challenges. Especially in the early days, there was a lot of fraud and identity theft. Instead of the 30-dollar Bitcoin balance, many found empty wallets.

The strong fluctuations in the value of Bitcoin are also viewed critically by many, as they lead to major fluctuations in purchasing power among the population. El Salvador itself is estimated to have invested over 100 million US dollars from the state treasury in the cryptocurrency. Due to the fall in the price of Bitcoin in 2022, these 100 million US dollars are currently worth much less. The country's creditworthiness is suffering as a result. It is therefore not surprising that, according to a study by the Universidad Centroamericana (UCA), more than three quarters of the population consider the introduction to be a bad decision.

However, despite all the criticism, there are also many positive aspects. It can also be assumed that many effects will only become apparent in the longer term.

The fact is that the population has already saved over four million dollars in transfer fees in the first eight months. It is undisputed that the initiative has also attracted investment to the country - particularly from the crypto sector. In the long term, it can be expected that the spread of cryptocurrencies will continue to increase. This means that the developing country of El Salvador could assume a leading position in the cryptocurrency economy in the future.

El Salvador also had phenomenal tourism figures in 2022. Many also attribute this to the introduction of Bitcoin. If only because of the new global attention. Above all, however, the experience of El Salvador can serve as a case study for other countries and the world.

The example of El Salvador shows that the introduction of Bitcoin as the official national currency poses various challenges. First of all, a high level of acceptance must be created among traders and the population . Equally important is a functioning infrastructure with secure and user-friendly wallets so that Bitcoin can be used in everyday life. In addition, the population should be educated about the use and risks in order to prevent misuse and fraud. Furthermore, a regulatory framework must be created that clearly defines the legal status and taxation of cryptocurrencies in order to ensure secure and transparent use.

The story continues

Despite the challenges, cryptocurrencies offer numerous opportunities. In less developed countries in particular, they can promote financial inclusion and give poorer sections of the population access to payment systems. By using cryptocurrencies, people who do not have access to traditional banking services can participate in the global economy and process payments quickly and cost-effectively. This can help fight poverty and drive economic development in developing countries. In addition, cryptocurrencies also offer opportunities for innovation in areas such as financial technology and digital identity, which have the potential to improve the lives of many people around the world.

It remains to be seen whether El Salvador's example will be imitated in other countries or even worldwide. What is undisputed, however, is that the initiative has brought a lot of attention to the small country. El Salvador has made history with its courageous decision to introduce a decentralized financial system. The eyes of the world are now on the Central American country as it continues to develop and implement its Bitcoin experiment. El Salvador's decision has sparked a debate about the future of money and the role of cryptocurrencies in the global economy. The world will be watching intently to see how this development unfolds in the coming years.