Why El Salvador Is Embracing Bitcoin — And Why Skeptics Warn It Won't Work
Last week El Salvador became the world's first country to make Bitcoin legal tender. But the cryptocurrency's complexity and volatility are big challenges.
Last week, the small nation of El Salvador created big financial buzz in Miami. President Nayib Bukele announced that his country would be the first in the world to make Bitcoin a legal currency.
Businesses in the Central American republic are now required to accept the cryptocurrency along with the conventional currency used there, the U.S. dollar.
As the pandemic continues, you can rely on WLRN to keep you current on local news and information. Your support is what keeps WLRN strong. Please become a member today. Donate now. Thank you.
WLRN’s Christine DiMattei spoke with Americas editor Tim Padgett about why El Salvador is adopting Bitcoin and why cryptocurrency is gaining popularity around Latin America.
Below are excerpts from their conversation, edited for clarity:
DIMATTEI: Tim, please first remind us what Bitcoin is and how it works.
PADGETT: As you mentioned, Bitcoin is a cryptocurrency, a digital currency created as an alternative to the global monetary system. It's not controlled by government central banks but by the ordinary folks who use it. Bitcoin transactions are monitored on a cyber-ledger known as blockchain. And a lot of people insist it will democratize money the way the Internet democratized information.
Salvadoran President Bukele broke the news about his country making Bitcoin legal tender at the big Bitcoin conference that was held recently in Wynwood, right?
That's right, at Bitcoin 2021. During a presentation by a Chicago Bitcoin payments processing company called Strike, which has been helping El Salvador develop its Bitcoin infrastructure, a video message from President Bukele suddenly came up on the screen:
“In El Salvador, we are trying to start the design of a country for the future…I believe Bitcoin…will generate jobs and help provide financial inclusion to thousands outside the formal economy….”
You couldn’t hear the last part of his message because the Bitcoin enthusiasts at the conference were cheering and applauding him so loudly.
Bukele says Bitcoin is a way to get more Salvadorans into the formal economy. Critics say El Salvador's deep financial illiteracy is precisely the reason Bitcoin won't be widely used there.
So why is El Salvador doing this?
In that video, Bukele emphasizes “financial inclusion.” In Latin America most people are not in the banking system. In El Salvador, 70% are not. They don't have bank accounts or credit cards, and the financial system makes very little effort to bring them in. Bukele is just 39 years old, and he sees himself modernizing a developing country. And so to him, Bitcoin is a way of getting more Salvadorans into the formal economy.
Another concern is control: El Salvador dollarized its economy 20 years ago, and there’s a feeling the country is too vulnerable to the actions of the U.S. Federal Reserve. They’re worried about inflation, for example.
But perhaps the biggest issue is remittances, the money migrants send back to their home countries. That accounts for a fifth of El Salvador's GDP — but transfer fees eat up about 7% of it. Bitcoin transfers supposedly won't face those fees. And I should mention that’s also appealing in places like South Florida, where people send lots of money back to countries like El Salvador.
To a lot of people, that might sound like more promise than practicality. Based on what you know about El Salvador's economy, do you think Bitcoin could realistically become a widely used currency there?
I'm skeptical. Bitcoin supporters point to a sort of pilot project that started two years ago in El Salvador in a coastal fishing town called El Zonte — where that Chicago company Strike introduced a phone app for Bitcoin transactions called Bitcoin Beach. Some people are using it to buy and sell things there. There's even a Bitcoin ATM there.
But Bitcoin has not become all that widely used in El Zonte. I spoke with Jose Miguel Cruz at Florida International University, a Latin America expert who’s originally from El Salvador. He argues that, ironically, the thing that's going to keep Bitcoin from taking off in El Salvador is the very problem that its promoters claim it will solve there: that is, too few people are in the formal financial system. In other words, he says there's still too much financial illiteracy in El Salvador to make an even more complex currency like Bitcoin successful there.
Meanwhile, President Bukele is a pretty controversial figure himself.
He is. He's popular in El Salvador but he's also an authoritarian leader and he's coming under a lot of criticism from the U.S. So a lot of critics are calling the Bitcoin plan just a diversion tactic.
Could El Salvador's Bitcoin campaign take off around the rest of Latin America?
Quite possibly. As I mentioned, more Latin Americans want to be included in the financial system. In places like Venezuela they also see Bitcoin as an escape from their collapsed economies and currencies.
But they often ignore Bitcoin's biggest red flag: its volatility. Its value can fluctuate wildly — and that's also why people question if it will work in El Salvador.