In June 2021, the President of El Salvador made Bitcoin a national currency on par with the US dollar. Let’s have a look at the consequences of this act and whether the adoption of Bitcoin as a legal tender has been a success.

Reasons for adopting Bitcoin as the national currency

El Salvador’s president, Nayib Mukele, has put forward several reasons for this decision. Firstly, the country is under strong influence from the United States due to US intervention in El Salvador’s civil war, and as a result of this influence, the national currency is the US dollar. The President of El Salvador wanted to offer an alternative to the dollar to enable his country’s diaspora to make money transfers to the country. The aim is to avoid the costs associated with using the dollar for these transfers. The other reason given is to give the population easier access to financial systems, since almost 70% of the country’s population has no bank account.
The desire to break away from American influence is most likely true. But another likely reason is that adopting Bitcoin will also make it easier to trade with the gangs and cartels that run the country. Indeed, several Salvadoran politicians close to the President have been pinpointed by the USA for their proximity to gangs. Bitcoin is difficult to trace, so it is possible that its adoption will make it possible to limit the traces of exchanges with local gangs.

Is the adoption of Bitcoin a success?

The government has developed a national wallet to store its Bitcoins, called Chivo. But it has been a major failure. In fact, 61% of users ended up uninstalling the application. The reason: recurring security problems and bugs make the wallet unreliable, and the risk of having its contents stolen is quite high.
What’s more, the company that developed Chivo later clarified that it is not Bitcoins that are stored in the wallet, but dollars in digital format. It was speculated at the time that fears of the President’s personal interest in adopting Bitcoin were well-founded. These currencies can be withdrawn by the government or private bodies, and the system would operate similarly to the banking system, without respecting the financial regulations that go with it.

What does the future hold for Bitcoin in El Salvador?

The opinions are mixed. The population is not particularly using the service set up by the Salvadoran government, and the solution is not particularly used for making transfers into the country either, with only 1.6% of transfers being made in Bitcoin in February 2022, according to the Salvadoran central bank.
However, this adoption of Bitcoin as a national currency is a first, and it takes time for something new to be adopted by the population. We will therefore have to continue to monitor the development of Bitcoin in El Salvador over the coming years.

Sources : 

estrategias_para_la_inversion_el_salvador_0.pdf (cepal.org)

b05023_7825615207654784864b4c4cc4ec6550.pdf (davidargente.com)

Athena: “Los salvadoreños reciben tokens, no dólares en su Chivo Wallet” (elfaro.net)