Bitcoin, a borderless, digital currency controlled by code rather than a central bank, officially became legal tender in El Salvador on Tuesday despite international skepticism and pushback.
The roll-out took place just 90 days after President Nayib Bukele, a populist, announced plans to adopt the cryptocurrency at the Bitcoin 2021 conference in Miami.
In the months since that announcement, which capped off the glitzy two-day gathering, the government has worked to prepare the economy for a law that requires all businesses to accept bitcoin as a form of payment and allows citizens to pay taxes in bitcoin as well.
After a rocky start, including protests, technical glitches with the government's wallet app, and at least a 17 percent drop in bitcoin's price, the country is pushing ahead with its plan.
Bukele, for his part, hasn't flinched. The 40-year-old president tweeted that the country was "buying the dip" following Tuesday's price slump, and said El Salvador now holds 550 bitcoin in reserve, which is worth about $25 million at the current price of $47,000 per coin.
Not everyone is so confident in the country's prospects. Crucially, the International Monetary Fund (IMF) isn't happy about the country's leap into crypto-land. As El Salvador negotiates for a $1 billion loan, the international lender has made it clear that it sees crypto adoption as a threat to economic stability.
With international aid hanging in the balance, and the country's debt markets already taking a beating amid the transition, the headwinds from Bukele's decision are hard to ignore.
Yet bitcoin maximalists are predictably heralding the launch as a watershed moment for the world's largest cryptocurrency, even as skeptics point to the possible risks of placing bitcoin, a volatile digital asset, alongside the U.S. dollar as a medium of exchange and store of value.
Many who are less ideologically committed are simply waiting to see what happens.
"This is really nothing more than an experiment to see if a country can take bitcoin onto its balance sheets without negatively impacting its fiscal position," Christopher Vecchio, a senior strategist for the analytics firm DailyFX, told Cheddar.
Measuring the success of that experiment, according to most industry-watchers, requires looking at one of the main indicators in El Salvador's economy: remittances.
Dollars to Bitcoin
Remittances, which are non-commercial payments from abroad, are the lifeblood of the Salvadoran economy.
According to the most recent data from the World Bank, they make up 24 percent of the country's gross domestic product, which is about $6 billion in U.S. dollars.
"If we see a significant chunk of that flow turn into bitcoin, then we may say this is a success," said Vecchio.
Vecchio, like many in the traditional financial world, has been skeptical of calls to make bitcoin a medium of exchange in low-income countries such as El Salvador and Afghanistan, but he does think that bitcoin offers advantages when it comes to cross-border transactions specifically.
"Afterall, bitcoin is supposed to be frictionless," he said. "This could be a way to cheaply and quickly transit money back domestically."
Financial service companies such as Western Union stand to lose millions in revenue if people start using bitcoin en masse, according to a CNBC report.
Mario Aguiluz, vice president of sales for IBEX Mercado, a Guatemala-based bitcoin payment terminal service that helped with the roll-out in El Salvador, also said remittances are key.
"What would success look like in El Salvador? Success is going to look like people receiving their remittances in bitcoin through the Chivo app, or whatever app they're using, and people and companies feeling much more comfortable holding bitcoin themselves," he said.
Government employees wait for the opening of the Chivo digital wallet machine, which will exchange cash for Bitcoin cryptocurrency, at Las Americas Square in San Salvador, El Salvador, Tuesday, Sept. 7, 2021. Starting Tuesday, all businesses will have to accept payments in Bitcoin, except those lacking the technology to do so, according to a law approved by the congress. (AP Photo/Salvador Melendez)
Days after the official launch, it's impossible to say if Salvadorans are already converting to bitcoin in higher numbers, but recent data show that the country was already moving in that direction prior to the new law.
Blockchain data platform Chainalysis told Cheddar the number of remittance payments valued at less than $1,000 that were also made in bitcoin increased from 1,000 transactions in April 2019 to 12,000 transactions in June 2021. Over that span, the monthly value of these transactions jumped from around $178,000 to more than $2.6 million.
Vecchio noted that this is still a drop in the bucket compared to the total value of remittances coming into El Salvador.
"If we were to see that bitcoin transfers move up into the $100-$200 million range, then we could say that it's a success," he said.
In the world of crypto, however, it's conceivable that bitcoin adoption could be used for less socially useful ends, like dodging taxes or engaging in illegal activity.
Amanda Wick, chief of legal affairs at Chainalysis, told Cheddar that it's crucial for El Salvador to develop its bitcoin economy carefully and responsibly.
"At the most basic level, success will look like an increased adoption and use without a commensurate increase in illicit use," she said. "We've seen that across the industry, where use has exploded but illicit use has not."
Trust and access
Aguiluz's firm spent much of the lead-up to the roll-out working with businesses to set up terminals that allow them to decide how much of the bitcoin they accept from customers will be instantly converted into dollars. He noted that most companies will convert most, if not all, of the bitcoin they receive, while a small number will keep their bitcoin and hope it gains in value.
He said much of the confusion prior to the roll-out came from business owners, who didn't understand how accepting bitcoin would impact their bottom line, but now regular Salvadorans are the ones speaking out against bitcoin adoption.
Aguiluz said the outcry mostly stems from understandable frustrations with the pace of the roll-out, rather than some innate opposition to bitcoin.
Farmers hold signs emblazoned with messages against the country adopting Bitcoin as legal tender, during a protest along the Pan-American Highway, in San Vicente, El Salvador, Tuesday, Sept. 7, 2021. El Salvador became the first country to adopt Bitcoin as legal tender Tuesday, but the rollout stumbled in its first hours and President Nayib Bukele informed that the digital wallet used for transactions was not functioning. (AP Photo/Salvador Melendez)
"I've seen people who have gone to the protests and their general sentiment is not that they're necessarily against bitcoin, but they're more against the way the whole thing has been managed," he said. "People need more education and more time in that sense."
They also need greater internet access, as many critics of the law have pointed out.
Just a third of the nation currently has access to the internet, according to the World Bank.
"This feels a little bit like a startup launch, right, with a broken app and everything," Sarah Kunst, managing director at Cleo Capital, told Cheddar. "But the reality is these are real people in a real country looking around saying, 'I don't even have wi-fi.'"
Put another way, without infrastructure and trust, bitcoin could have a hard time making inroads into the majority of El Salvador's population. In addition, events like the price drop on Tuesday — which the president shrugged off as an opportunity to buy the dip — could make building trust difficult for a population still trying to understand the basics of cryptocurrencies.
"For people yesterday who got into bitcoin for the first time in El Salvador, they did take the jump and all the sudden the value of their holding dropped by 18 percent at some point," Vecchio said on Wednesday. "That's not really a sign of faith that it's a viable store of wealth, and that makes widespread adoption that much more complicated moving forward. Trust is gained in drops and lost in buckets, and yesterday was a 'lost in buckets' type of situation."