El Salvador became the first country to adopt the cryptocurrency Bitcoin as their legal tender. As a result, if Salvadorans use Bitcoin as payment for goods and services and taxes, the payee must accept it. To incentivize public use, citizens who download the government’s digital wallet, Chivo, receive $30 in Bitcoin.
Supporters of the new policy contend that Bitcoin will benefit the 70% of Salvadorans who currently do not have bank accounts. Lack of a bank account creates challenges to access financial services like savings. A Bitcoin wallet, safeguarded through passwords, may prove safer than stockpiling cash in a home. Some firms also allow Bitcoin savers to receive interest on their cryptocurrency.
Salvadoran President Nayib Bukele also claims that Bitcoin will help boost the economy. Remittance, or money sent to El Salvador by workers living abroad, constitutes 24% of its GDP. Transferring money from other countries requires an in-person visit to traditional financial institutions like Western Union and a transaction fee. After waiting several days, the recipient usually travels to a physical location to pick up the money, which poses risks of gang robbery. Bitcoin can circumvent delay, fees, inconvenience, and security concerns through converting Bitcoin received with a mobile phone and internet connection into dollars. Bukele estimates Salvadorans will save 400 million from commission fees.
However, some analysts are skeptical of real savings. World Bank data suggests that El Salvador has the sixth-lowest remittance transaction fee of 2.85%. Salvadorans who prefer using the dollar because of internet or app problems and do not have bank accounts must convert their Bitcoin to dollars through bitcoin ATMs. The ATM company Athena plans to install 1,500 new machines in the country and charges a minimum 5% fee, much higher than the original remittance transaction fee.
Another risk to Bitcoin adoption is its high volatility. The price of Bitcoin fluctuates based on expectations, the supply of Bitcoin through mining, market demand, and competing cryptocurrencies. Paying taxes through Bitcoin could lead to sudden changes in revenue, expectation of a rising Bitcoin price may cause consumers to wait, borrowers and lenders may incur losses according to the changes in Bitcoin’s value, changes in Bitcoin’s supply could impact price inflation, and the economy could experience instability. Many also fear that El Salvador could become a breeding ground for money laundering by making it easier for criminals to convert their money obtained from illicit activity into US dollars.
To create Bitcoin, “bitcoin miners” use powerful computers that solve complex mathematical puzzles. Because Bitcoin can be easily duplicated, every time someone uses Bitcoin for a transaction, it must be validated and entered into a public ledge called a blockchain. Miners are awarded with Bitcoin and transaction fees for adding new blocks of transactions. The bottom line is that all of these computations require massive amounts of electrical energy.
To put things in perspective, a recent New York Times report found that mining a single Bitcoin now consumes the equivalent of 9 years of typical household electricity. The Bitcoin network uses “more than a third of what residential cooling in the United States uses” and “more than seven times as much electricity as all of Google’s global operations.” Consequently, president Bukele announced his plans to use geothermal energy that is “very cheap, 100% clean, 100% renewable, 0 emissions” from El Salvador’s volcanoes for Bitcoin mining.
Other critics believe that the President is simply using this new controversial decision as a political distraction from his unconstitutional actions. Last year, he dismissed Supreme Court rulings that the executive department does not have the power to detain people for violating quarantine. He then removed judges to control the court, which led to a ruling that nullified the El Salvador Constitution and permitted him to run for a consecutive presidential term in 2024.
Countries, investors, and Salvadorans will continue to examine how this Bitcoin “experiment” plays out and determine whether the results match President Bukele’s intentions.