Since its beginnings, the financial system has inspired suspicion. The 2008 financial crisis that plunged the world into a prolonged recession and resulted from the speculative attitude of financial institutions has recently encouraged a new reason to reject big banks.
This event can be considered a fundamental cause of the creation of cryptocurrencies. Only six weeks after the collapse of Lehman Brothers, the person or persons behind the pseudonym “Satoshi Nakamoto” made the mythical publication that would begin Bitcoin.
When cryptocurrencies appeared, the utopia of freeing oneself from state control and the anonymous financial system regained its strength. However, soon after, enthusiasm gave way to doubts, especially regarding security and stability. People began to wonder how to avoid the same scams from the era of laissez-faire banking.
So far, cryptocurrencies have yet to have enough momentum to become a token of exchange with the ability to compete with the dollar or other local currencies, and their use for transactions, despite the increasing value of some cryptocurrencies, is very marginal. At least until the president of El Salvador, Nayib Bukele, decided to implement the Bitcoin Law, which made this small Central American country the world’s first to accept Bitcoin as a regular-use currency.
Implementation of the Bitcoin Law in El Salvador
The subject was announced in June 2021 at a cryptocurrency conference in Miami. The presidential presentation was optimistic, promising to generate employment, financially including the population, and allowing Salvadorans abroad to send money to their families, avoiding the high commissions of the traditional banking system.
All of the above are very relevant objectives in a country that, by 2021, had a 6.3% unemployment rate and a 37.6% underemployment rate. And that also depends heavily on remittances, which accounted for 28% of GDP in 2021, according to the Salvadoran Foundation for Economic and Social Development.
But, curiously, the presidential message was delivered in English, which excluded most of the Salvadoran population receiving the economic policy and specifically addressed the cryptocurrency community that mainly communicates in this language.
There was also no further explanation of the process in parliament, which, as it is controlled by President Bukele’s party, New Ideas, quickly approved the Bitcoin Law in a five-hour session with little discussion. The short legal document established in Article 7 that service providers must accept Bitcoin payment, while Article 5 granted a tax exemption for Bitcoin capital gains.
Despite the noble first intentions, the big winners were ultimately foreign investors, government officials, and business leaders.
Despite the criticisms that Bukele launched during his presidential campaign against the previous political establishment, especially against the previously dominant ARENA party, the process of introducing Bitcoin as a regular-use currency did not differ much from the dollarization process in 2001, where there was little interest in including the Salvadoran population in the macroeconomic discussion.
Macroeconomic Consequences After One Year
The implementation process began in September 2021 with the offer of $30 to all those who downloaded the Chivo Wallet application (Chivo Wallet, a word commonly used in El Salvador to describe something cool), through which one could conduct cryptocurrency transfers. Some people downloaded the application and used the $30 but then did not use the application again. According to the National Bureau of Economic Research, 6 out of 10 users stopped using it after spending the bonus.
Many more Salvadorans preferred to take to the streets and protest against introducing cryptocurrency. According to a survey conducted by the Central American University (UCA) in September, nearly 70 percent of Salvadorans oppose the Bitcoin policy, as reported by Reuters.
After a year of implementation, many international observers and specialists in the country concluded that the Salvadoran president’s Bitcoin Law was a failure, as strongly indicated by Salvadorans’ widespread lack of interest. According to a former president of the Federal Reserve Bank, less than 2% of remittances are coming through the digital wallet.
However, apathy for the digital currency is not the most serious problem facing El Salvador. Bukele’s government spent around 100 million dollars buying Bitcoin. Due to the asset’s loss of value, it has lost half of the investment. Perhaps, as some voices comment, this is a small amount, but it has deteriorated the country’s image for investors. The International Monetary Fund reached an impasse with the president over his insistence on keeping Bitcoin as a legal tender. In addition, the firms Fitch and Moody’s have downgraded the country’s credit rating, predicting it would default on its $800 million debt.
According to Fitch, the debt would reach over 80% of GDP.
Social Problems
All this scenario makes us wonder about the social effects that Bukele’s risky economic policy has generated. Although it is still early, some elements give us clues as to what may happen in the future.
Due to the possibility of non-payment, the Bukele Administration has issued some statements. In April of last year, it announced reforms in the Salvadoran pension system. However, it still needs to be determined what these reforms imply or how much they expect to collect.
At the end of May, the Finance Minister said he would cut public expenditures, including unnecessary positions, to raise $50 million per month for gasoline subsidies and reduce the effects of inflation.
Meanwhile, a report by The Intercept has detailed even more dire effects, such as the forced displacement of people living on the land that will be used to build the future airport in Bitcoin City.
El Salvador’s technological utopia is looking more and more exclusive and less and less optimistic.
About the Author
José Guillermo Perez is a Brazilian social scientist with an extensive background in copywriting.