MEXICO CITY – El Salvador on Tuesday became the first country to adopt Bitcoin as legal tender, allowing the cryptocurrency to be used in any transaction from buying a cup of coffee to paying taxes.
The bold move, largely celebrated by the international bitcoin community, has found a more skeptical reception at home and in the traditional financial world, amid concerns it could bring instability and unnecessary risk to the Central American country’s fragile economy. .
President Nayib Bukele, a tech-savvy millennial, has promoted the adoption of the digital currency, promoting it as a way to get more Salvadorans, about 70 percent of whom do not have bank accounts, into the formal economy. Using the cryptocurrency would make it faster and cheaper to get remittances from abroad, he argues, and could free the indebted nation from the grip of the traditional global financial system.
Making Bitcoin legal tender — alongside the dollar, which the country has relied on since 2001 — is also part of Mr. Bukele against crypto entrepreneurs, who often seem to be his primary target audience.
The country learned of the plan when Mr. Bukele announced it in English at a Bitcoin conference in Miami. Days later, as Congress voted to approve the measure, the president chatted with US crypto enthusiasts on a social media hangout.
In El Salvador, many are watching the move with confusion and mistrust, fearing that the volatility inherent in using virtual tokens without physical support, which tend to rise and crash in value, could be dangerous to the economy – and their own savings.
“We really don’t know how that system is going to work,” said Evelin Vásquez, 52, who sells cell phones in the capital’s San Salvador, and knows that Bitcoin’s fluctuations in value could wipe her savings.
“You can lose what you invest and gain nothing,” she added.
Financial analysts worry that that instability is rippling through an entire economy.
“Having that risky exchange rate volatility is what they tried to avoid when El Salvador entered the dollar,” said Jaime Reusche of Moody’s rating agency, which downgraded El Salvador in July, in part because of the Bitcoin law. “This clearly has no precedent.”
The development of Bitcoin and thousands of other cryptocurrencies in just over a decade has changed the definition of money and transformed financial services, causing officials around the world to rush to catch up.
El Salvador’s move puts it at the forefront of a revolution in finance on the blockchain, where a parallel universe of crypto-based alternative banking services is booming, sparking alarm among officials in Washington and beyond.
It is unclear how it will all develop.
The new law requires all businesses to accept Bitcoin as payment. The government will also create a trust with $150 million dollars in public funds to facilitate dollar conversions, among other things.
To promote the use of Bitcoin, the government launched a digital wallet called “Chivo”, which is Salvadoran slang for cool, and will pay a $30 Bitcoin bonus to citizens who download it. Salvadorans will also be able to withdraw cash from 200 ATMs and 50 counseling centers across the country, according to Mr Bukele.
But only about a third of Salvadorans use the internet and almost a quarter live below the poverty line. Most have said they have little intention of using Bitcoin, according to a recent survey in the newspaper La Prensa Gráfica.
The enthusiasm from abroad also rings hollow to some in El Salvador, who hear echoes of the financial colonialism that claims to undermine the global crypto movement.
“It seems that for them El Salvador is just a tool to promote their cryptocurrency,” said Tatiana Marroquín, a Salvadoran economist. “El Salvador is not just a means to an end – for us El Salvador is the goal.”
Even some Bitcoin proponents are wary, Jerry Brito of Washington crypto research group Coin Center said: There are “clear contradictions” with the official approval by a national government of a currency designed to thwart government control over money. .
International financial regulators have also raised legal concerns. The World Bank and the International Monetary Fund, which is considering a separate financing deal with El Salvador, have said that adopting Bitcoin could expose a country to money laundering and other illegal financial activities.
El Zonte, a coastal town in El Salvador, became a litmus test for the currency’s national acceptance after an anonymous donor began seeding Bitcoin in the community in 2019. While Bitcoin adoption has been mixed among residents, some locals are adamant about the experiment’s success.
Naotoshi Yamasaki, a surfer, said Bitcoin ATMs can quickly run out of dollars, but overall the project has worked.
“We all use Bitcoin,” he said, although it is well known that with cryptocurrency, your money can “go up, just as it could go down”.
This volatility is one of many obstacles to applying the lessons of a sleepy beach town to a national financial system. Bitcoin price fluctuations can challenge the government’s ability to meet conversion needs. And if the trust fund is liquidated, taxpayers may be left behind, argues George Selgin, a monetary economist at the Cato Institute.
But crypto proponents say Bitcoin is just the first step in a larger world of alternative financial services that could facilitate receiving money transfers from abroad — which Salvadorans increasingly rely on — and attract investors.
Matthew Sigel, head of digital asset research at global wealth management firm VanEck, has questions about how the government fund will operate, but believes crypto could help El Salvador “shake off the yoke of dollar colonialism,” perhaps with creative investment vehicles that leverage traditional channels and Bitcoin mining operations that utilize natural resources.
For many observers, the move is symbolic of Mr. Bukele’s penchant for autocracy.
A charismatic young leader who uses social media to rally fans and spar with enemies, Mr. Bukele increasingly used his hold on the country to concentrate power and silence opponents.
Last week, Mario Gómez, an outspoken critic of the Bitcoin law, was briefly detained without a warrant and his cell phones were seized by police.
“There is a deterioration of press freedom and freedom of expression,” said Otto Flores, a lawyer representing Mr Gómez. “It’s worrying — you can’t deny it.”
A government spokeswoman declined a request for comment. the national police said on Twitter that Mr Gómez is being investigated for ‘financial fraud’.
Mr. Bukele is steadfast in the face of criticism. “Salvadorans already know me and know that I would never do anything that was not in their favor,” he said said on Twitter in June.
And despite widespread opposition to Bitcoin, the president himself maintains skyrocketing popularity, with 85 percent approval, according to a poll last week by La Prensa Gráfica.
With such support and absolute control over the levers of power, it is unlikely that anything will stop Mr. Bukele’s plans – for Bitcoin or other reforms.
“The regime has very strong controls,” said Noah Bullock, executive director of Cristosal, a human rights organization. “He is everything.”
Nelson Renteria contributed to reporting from San Salvador.