Last year today, Salvadoran President Nayib Bukele announced that the country would introduce a bill to make the Bitcoin cryptocurrency legal tender in the South American nation.
Bukele kept his word, making El Salvador the first nation to adopt bitcoin as legal tender on September 7, 2021.
The president announced his intention to make Bitcoin legal tender in El Salvador at the Bitcoin 2021 conference in Miami. Interestingly, Bukele’s decision is considered the first experience of a country using a volatile currency as legal tender. Notably, this regime has attracted many critics, including the International Monetary Fund and top economists.
Many experts have claimed that this step will actually lead to an increase in money laundering and illegal activities.
Several financial experts doubted the results of this decision pointing out that Bitcoin is very volatile. They also argued that cryptocurrency has no physical medium, which makes this decision even more misguided and underdeveloped.
The volatility of the crypto markets, especially Bitcoin, can also be understood via numbers. Bitcoin was trading near $69,000 in November 2021 and crashed to $30,000 in June 2022, just over six months old. The global cryptocurrency market cap has also fallen from an all-time high of $3 trillion to $1.25 trillion in the past 6 months.
Why did El Salvador plan to adopt Bitcoin as legal tender?
President Bukele, while announcing his intention to legalize Bitcoin as legal tender, claimed that it was to improve the rather underdeveloped country financially. Bukele said the move would make financial services more accessible in the Latin American country where more than 70% of the local population does not have a bank account.
Bukele also said the move will also improve remittances from abroad, which helps the national economy. Interestingly, Bitcoin transactions are considered cheaper for sending large sums of money at considerably lower fees.
The president claimed that after the underdeveloped adoption of Bitcoin as legal tender, the country would save $400 million in annual remittance fees.
How has the government helped Bitcoin adoption in El Salvador?
After the law was rolled out in September, the Salvadoran government launched the Chivo Wallet app. The nation has also held large-scale awareness camps to teach people how to use the digital wallet and familiarize them with Bitcoin.
The Chivo Wallet app allows users to convert bitcoin to dollars and vice versa at no cost. Users are also allowed to send and receive either currency through the wallet.
What was the result of this experience?
Nayib Bukele has repeatedly claimed that the decision has contributed to the country’s economic boom with increased access to financial services.
Additionally, the Salvadoran Minister of Tourism claimed that the adoption of Bitcoin has also boosted tourism in the country. She claimed it had led to a 30 per cent increase in tourist numbers with 1.4 million people visiting the country.
El Salvador also hosted several top central bankers and economists at a Bitcoin meeting recently and discussed plans for Bitcoin City.
Despite claims by the government and ministers, the country is still experiencing low GDP growth rates. GDP growth rates have not exceeded 10% over the past two decades, with GDP growth in 2021 being 4.2%.
GDP growth in 2018 and 2019 was 2.4% each. Compared to this, the 2021 levels seem like an improvement, but it should be noted that while making such assessments, the year 2020 needs to be discounted due to covid and the pandemic which led to an economic downturn after which all economies posted exceptional growth .
It is safe to say that more time and data would be needed to judge the Bitcoin experience in El Salvador.