El Salvador’s Grand Bitcoin Experiment

Welcome to El Salvador, where the pupusas are warm and the bitcoin is tender.

Today, the Central American nation will become the first sovereign state to make bitcoin “legal tender,” meaning it’s now an official currency alongside the US dollar. In theory, El Salvadorans can now pay for anything—a haircut, house, or even taxes—using bitcoin. 

The initiative is the brainchild of President Nayib Bukele, a 40-year-old populist whose approval rating of around 90% has emboldened him to reshape the country in his vision.

Why do this? 

• One-quarter of El Salvador’s GDP comes from remittances—money sent back to the country from people working abroad. Bitcoin could reduce fees on those cross-border transactions.
• It’s an attempt to bring more Salvarodans into the economic fold, the majority of whom don’t have a bank account.
• Bukele also thinks that, by being an early adopter, the country could become a destination for foreign investment in bitcoin mining. He wants to use geothermal energy from El Salvador’s volcanoes to power the energy-intensive mining process. 

Like all experiments, this one could backfire

Despite all the buzz around crypto, bitcoin hasn’t been used as an actual currency at scale before. As a business, it’s important to accept payment in currency that won’t plummet in value in the future. Bitcoin, however, has been known to be extremely volatile. 

And because bitcoin by definition skirts traditional financial institutions that promote stability, the International Monetary Fund is concerned that El Salvador’s adoption of the crypto could create serious risks for the country’s economy. As a result, it downgraded El Salvador’s debt further into junk territory. 

Other critics say the bitcoin move is a PR play to distract from Bukele’s increasingly authoritarian tactics. After his recent calls to “purge” the government’s judicial branch, his allies recently passed a law to remove one-third of the country’s judges and prosecutors. 

Bottom line: However this shakes out (and no one knows how it will), expect a lot of “I told you so”s from both sides of the debate. — NF