Ines AissaniLe Salvador was the first country in the world to legalize Bitcoin along with the US dollar in the country. It was a very controversial decision that President Nayib Bukela has continued to advocate for ever since. It was the first time that a country had taken such a step before the Central African Republic joined it a few months later. In a few years, this will (probably) seem anecdotal to us, but in 2023, we still salute the audacity of this initiative.
However, in Latin America, other countries are showing interest in bitcoin and cryptocurrencies. Very often there is still a divide between the use made by the population and the policy adopted by the country. For'Argentina for example, the population sees it as a shield against galloping inflation of the Argentine Peso and increasingly uses bitcoin as a savings currency.
The president of El Salvador serves as a leading figure in this general movement. He aims to make the country a hub for bitcoin and has proposed issuing the first obligations financed in bitcoin (see “Volcano Bond“). A historic first. We then spoke of El Salvador as the “Bitcoin City” par excellence.
This sharpens desire and interest for other countries in the region. We will see here why the legalization of Bitcoin is proving to be a boon for the continent. We will also see the limits of a bitcoinization from the continent.
Why did El Salvador opt for Bitcoin?
For the president Nayib Bukele, Bitcoin serves as leverage for different industries. By accepting bitcoin, the country will necessarily attract investors and companies in the cryptocurrency industry. Other sectors will necessarily be integrated into this new economic ecosystem. With this decision, El Salvador seeks to attract new capital that will be used for the development of the country as a whole.
What about the local population? According to data from the World Bank, only 30% of the Salvadoran population owns a mobile with integrated banking service. Thus, 70% of the population will have to use the Bitcoin cryptocurrency even though they do not yet have a bank account... This may seem like a trivial process, but the obstacles to adoption seem to have been thought out in advance by the government.
In reality, the country's low financial inclusion is considered an asset for Nayib Bukelé. For him, it is simpler to use bitcoin than traditional currency if the necessary tools are correctly provided.
Thus, the government plans to install more than 1500 ATMs and provide a dedicated wallet for each citizen: The Chivo Wallet. To encourage the population to use Bitcoin, the government distributed the equivalent of $30 in BTC free of charge to all residents. The latter would receive them on the Chivo wallet. This would then be a concrete incentive that would push citizens to use the digital wallet.
The ATM are ATMs where you can exchange dollars for bitcoins, and vice versa. Stores are required to accept bitcoin payments. Companies that offer blockchain-related services are favored in terms of taxes. Within “Bitcoin City”, we would find residential areas, shops, services, museums, etc. The idea being to create a real economic ecosystem where there was “nothing”.
In short, by accepting Bitcoin, El Salvador is making the ultimate bet to place itself in pole position in this digital revolution.
Regain a certain independence from external countries
If El Salvador has opted for bitcoin, the country initially cites economic reasons. The president assured, for example, that the monetary transfer of the Salvadoran diaspora will be simpler by using cryptocurrencies. Salvadorans living abroad will then be able to send bitcoin directly to their family members, without having to resort to third-party services such as Western Union.
The second, less obvious reason is to slowly move away from the US dollar. In fact, in 2001, the national currency, “the Salvadoran settler” was replaced by the American dollar because of unsustainable hyperinflation…The American dollar, as is often the case in such situations, was the choice “out of spite” and this is the ultimate opportunity to break away from it. What must be understood is that El Salvador has no longer held the strings of its monetary policy since 2001. Accepting bitcoin then turns out to be an interesting alternative to using dollars.
There are other countries with fragile economies that prefer to use a strong international currency rather than a local currency. In general, this avoids excessive fluctuations in the currency. In an international trade dynamic, having a recognized and stable FIAT currency turns out to be much more effective, in fact.
Latin American populations are increasingly using cryptocurrencies
A distinction must be made between governments and the population. It turns out that very often, the population is much more “tolerant” and active with cryptocurrencies than governments. This is explained because the interests of some are different from others. For the population, Bitcoin remains a safe haven in the same way as gold, for example. For governments, Bitcoin is often seen as an external currency destabilizing and depreciating the national currency.
One might wonder why Latin American countries are tempted to follow the Salvadoran model. It should be remembered that the vast majority of populations in Latin America are still “unbanked”. This is then the royal - and paradoxical - way to push the population to enter, otherwise, the banking world and a fortiori in the financial world.
This is also the point shared by Claire Balva, the co-founder Blockchain Partner. She says according to the article published in the magazine “Geo" that “bitcoin could give more people access to financial services”.
This is indeed the great interest of using Bitcoin: Succeeding where banks have failed. Local populations will be able to engage in other decentralized finance services, such as lending For example. This would then be a new way of accessing micro-credit, a very popular service in the country. Access to financial services that were once inaccessible would suddenly become affordable for the majority of the population.
Of course, other countries are currently working on their monetary policies to follow El Salvador's path. This is the case of Paraguay which seem very close to a future legalization of Bitcoin while being increasingly severe with illegal mining... Some rumors predict that Argentina would be the next country on the list. Venezuela was one of the first countries to see cryptocurrencies as progress for the country. We remember the Petrodollars (XPD) as a controversial experience, certainly, but nevertheless innovative. In fact, the population is now ready to use bitcoin or another cryptocurrency as a currency.
Disparate regulation within the continent
It would be wrong to speak of Latin America as a single homogeneous entity on the issue of bitcoin and cryptocurrencies, in general. Some countries are very resistant to bitcoin, as is the case with Bolivia, which banned the use of cryptocurrencies in 2014. The same year, Ecuador decided in the same way.
Tolerant countries include Brazil, Venezuela, Argentina and Chile, which have all approved the use of cryptocurrencies within the country.
According to The report of Statista, Argentina comes in 4th place in terms of use of cryptocurrencies in the world. In 8th place, we find Brazil.
Many Latin American countries have regulations regarding cryptocurrencies. Some of these regulations are rigid, to the point of prohibiting this digital currency, and others are free, authorizing its daily use. Others, on the other hand, impose taxes on income from this digital currency. (Source: https://www.eclac.cl/fr/estadisticas-criptomonedas-latinoamerica/)
What benefits could Bitcoin bring to Latin America?
The populations of Latin America, just like the African populations, find it beneficial to use cryptocurrencies. The main reason comes from low financial inclusion and an unstable national economy.
That said, from a global perspective, bitcoin could improve internal trade within the continent. Indeed, currently, monetary exchanges between the countries which are part of the FTAA are costly. It is necessary to convert local currencies with fluctuating exchange rates on the one hand, which turns out to be unbalanced for one or the other party depending on the currency rate. On the other hand, it is the banks which carry out the transactions. This involves significant costs, administrative regulations, not to mention the 3-5 days of processing.
With bitcoin payment, merchants can pay and get paid almost instantly. They can carry out financial transactions without using banks. A real saving of time and money. A boon for internal and cross-border trade.
This is only a small part of the advantages of legalizing Bitcoin within each country and across the continent. Citizens could create stores more easily as the payment system is already given and available.
On a larger scale, Salvadoran citizens could use bitcoin to sell internationally to a broader target clientele. This opens El Salvador to the world in an unprecedented way.
Bitcoin adoption despite obstacles
The first major difficulty in implementing Bukele's policy undoubtedly remains the fact that a very small percentage of the population uses the national digital wallet. In addition, some people prefer US dollars to bitcoin, in particular because of its excessive volatility. However, beyond these particular obstacles, the country already seems to be enjoying positive economic benefits.
A year after the legalization of bitcoin, the president Nayib Bukelé issued a press release where he talks about the increasing figures for GDP, employment rates as well as a drop in crime since the legalization of Bitcoin. The president assures that bitcoin is a decision which has shown its first fruits and that these are only the premises.
–>Read: Nayib Bukele: “Stop drinking the Kool-Aid of the elites”
Indeed, one year of adoption of bitcoin is still a short time to conclude, however the government is determined to move forward with its pro-bitcoin policy. However, there are still many obstacles and it will take a certain amount of financial and cryptographic education to pass on to the population.
It will also be necessary for other countries on the continent and around the world to legalize Bitcoin. Recently, the Central African Republic became the first African country to accept Bitcoin as a means of payment. The country even launched the “sangocoin“, in a global indicator of digitalization of the country’s services. Africa and Latin America have similar problems in terms of financial inclusion.
It now remains to be seen whether certain countries are ready to follow in El Salvador's footsteps...
See also:
Small error: According to data from the World Bank, only 37% of the Salvadoran population over 25 years old has an account with a financial institution or with a mobile telephone service provider...
Unfortunately, I don't know any figures on the percentage of the population that only has a bank account, the percentage of the population that just has a mobile money account, and the percentage of the population that has both...