El Salvador Adopts Bitcoin
El Salvador became the first country to officially adopt Bitcoin as a legal tender on September 7th, 2021, receiving mixed reactions internationally and domestically. The El Salvadorian Congress approved the “Bitcoin Law,” proposed by President Nayib Bukele of El Salvador, on July 7th, 2021 with a majority vote of 62 to 22. The lack of independent currency in El Salvador, a result of the 2001 dollarization, leaves the U.S. dollar and Bitcoin as the two forms of legally accepted currency. While consumer use of Bitcoin is optional, businesses are required to accept it as a form of payment.
Bitcoin does not flow through financial institutions like physical currency does, allowing it to operate largely outside of governmental controls and regulations. The decentralization of this currency makes it easy and cheap to transfer Bitcoin internationally but also poses a great uncertainty of value. Notoriously known to be extremely volatile and reactive, Bitcoin presents a stark contrast to the relative stability of legal currency. Cryptocurrencies are also susceptible to issues of money laundering and fraud due to its feature of anonymity, to which Bitcoin is no exception.
Bukele’s official statement behind this policy was to ease the strain of Salvadorian citizens living abroad sending money back to their home country. Over 2.5 million Salvadorians live abroad and consistently wire money to relatives in El Salvador, so much so that these remittances make up roughly 23% of the country’s GDP. The use of Bitcoin would theoretically save millions in wire fees, which would then be included in the remittances, boosting the economy.
However, many critics of this new policy worry about the rationale behind the decision. Claudia Ortiz, an opposing lawmaker, told Bloomberg, “Bitcoin was a very big economic decision, and it was done totally illogically, sent to congress and passed the same day.” This decision to adopt Bitcoin comes at a time of growing economic crisis in El Salvador marked by high cost of living and rising unemployment rates.
Others are more worried about what this policy means for the state of El Salvador’s democracy. With Bukele’s party forming the majority of El Salvador’s Congress, there was a removal of five long term judges and the new appointees have proven to be more favorable of Bukele’s policies. Shortly after this change, the court removed what had long since been considered a constitutional ban on consecutive presidential re-election. This move was widely interpreted as a way to allow Burkele to maintain his power past the standard presidential term. These actions, among others, lead many to believe Bukele is attempting to transition El Salvador from a democracy towards an authoritative government.
The day of the Bitcoin launch only confirmed many of these existing fears. The government-sponsored Bitcoin wallet, Chivo, slang for “cool,” in El Salvador, launched at midnight on September 7th and crashed in the first three hours. It wasn't accessible again until 11:30 AM. Transactions continuously failed throughout the day and Chivo’s ATMs ran out of cash. To further invoke disaster, Bitcoin’s value dropped by $10,000 USD in just three minutes at ten A.M. In real time, citizens were forced to watch their Bitcoin decrease in value, serving as a harsh reminder of the extreme volatility of the currency. This disastrous launch of Chivo was felt internationally, sending doubt through the bond market and causing institutions such as the World Bank and the IMF wary of producing further funding or loans to El Salvador.
The launch of Bitcoin served as a catalyst for a wave of social protests across the country. The Bukele Administration began the first flood of demonstrations by many citizens. While spurred on by the recent Bitcoin disasters, the protests also carried themes surrounding democracy. One protester who talked with Reuters, 49 year old Dora Rivera, asserted that “what the government is doing is arrogant, it is authoritarianism.” Although many of the protests remained peaceful in nature, a few escalated leaving behind damage to at least one Chivo ATM. The protests encompassed a vast array of political diversity, with people coming together from around the country to march as a united El Salvador in the face of Bukele’s recent actions. This act of unity sends a serious message to the government that Bukele continues to dismiss.
Bukele’s response to the protests on Twitter faulted the peaceful protesters as complicit with the destruction and vandalism of others, attempting to morally discredit the movement. He later went on to change his Twitter biography to “the coolest dictator in the world,” in an apparent mockery of those who claim him to be as such. The extreme juxtaposition between the severity of these domestic issues and Bukele’s laid back demeanor poses an intense conversation about the future of El Salvador’s democracy and economy.
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