The ambitious plan to become the first nation in the world to use Bitcoin as legal tender was intended to make remittances cheaper and promote financial inclusion. Unfortunately, it appears to have fallen short.
Rating agencies have severely dented the country's credit score, and a global decline in cryptocurrency prices has wiped out all of the government's 2,381 Bitcoin purchased with public funds.
Chivo Wallet
Nayib Bukele, El Salvador's president, launched Chivo Wallet - the country's first bitcoin wallet app - declaring it would save hundreds of millions in remittance fees. Remittances account for about 20% of El Salvadorans' gross domestic product and are an important source of income. Unfortunately, incumbent services charge 10% or higher in fees which can take days to process and often necessitate physical pickups to complete.
However, Bukele's gamble appears to have fallen short. A report by three American-based economists states that only 10% of those who downloaded the wallet app continue to use it for crypto transactions.
Many Salvadorans who downloaded the app are eager to use a new money system, but others are less than thrilled. Many users reported their personal information was stolen in a hack attack targeting chivo accounts, leaving some worried.
To open a chivo account in El Salvador, users need an ID number and valid phone number. Additionally, they must supply a photo of their ID as well as a selfie for facial recognition purposes.
For those unfamiliar with digital currencies, the process requires a great deal of information. It can be risky for those without expertise since identity theft can easily occur - which is why many are wary about the app.
Chivo wallet, though flawed, represents a positive step in the adoption of digital money in India. With more than 70% of citizens unbanked, digital wallets serve as an invaluable tool for financial inclusion and can act as a testing ground for crypto innovations as the country moves towards issuing its own national digital currency by 2021.
In an effort to gain a better understanding of how crypto accounts function in reality, we spoke with several Salvadorans who had tried out the chivo wallet. Most told us they found the service user-friendly but there were still some issues they encountered.
Some people reported difficulties when trying to transfer funds from their Chivo account to a cold storage account at a bitcoin exchange such as Binance. When calling the Chivo helpline, some experienced waiting times of weeks or even months before someone called back or sent an email with a solution for their issue.
On a more positive note, some Salvadorans have been successful in moving their funds to cold storage and are now investing in cryptocurrency futures. Some even used Chivo ATMs to top up their accounts with digital coins.
Remittances from abroad to El Salvador were reported by a media outlet there in May this year at USD 15.6 million - more than twice the amount sent last May. But even this small figure doesn't indicate that most remittances are crypto, which has raised serious doubts about El Salvador's BTC adoption plan.
Athena ATMs
In September 2018, El Salvador's President Nayib Bukele declared Bitcoin legal tender, heralding a historic shift. With such an expansive unbanked population, digital money had the potential to stimulate growth across his nation's economy. With this decision, Nayib had the perfect platform to prove it works!
But the initiative hasn't been without its drawbacks, and has been condemned by international institutions. The World Bank and International Monetary Fund both anticipate "macroeconomic, financial and legal" difficulties with its adoption.
These worries are especially pertinent in El Salvador, which is currently seeking funds for $1.6 billion of sovereign bonds due in 2023 and 2025. With its debt-to-GDP ratio at over 90%, El Salvador faces immense pressure. To stay afloat, the government has had no choice but to look elsewhere for income sources.
As a result, the nation's economy has suffered. The government currently has a deficit of 6% of GDP and its currency has appreciated in value. Furthermore, government debt is accruing interest, placing them in an even more precarious financial position.
In spite of all this, the government's Bitcoin adoption plan has yet to materialize. While some parts of the country have adopted cryptocurrency, most still rely on cash and only a handful have opened digital accounts.
Last year, the first cryptocurrency-based ATMs were installed in El Zonte as part of an experiment called Bitcoin Beach. According to CNN, the company plans on installing more machines across the country.
On June 17, Athena shared a tweet outlining its plans for the country. The firm plans to install 1,500 cryptocurrency ATMs, an ambitious goal which they intend to accomplish gradually.
Despite the difficulties, Athena representatives remain optimistic that Salvadoran adoption will be a success. Matias Goldenhorn, their Latin America director, noted their services can contribute to economic growth by helping Salvadorans who live abroad send back remittances.
He noted the potential uses for digital currencies, such as paying utility bills or purchasing items from local businesses. Nonetheless, he acknowledged that the technology may not be widely accepted yet and it poses a challenge to get everyone in the country to understand and utilize a digital currency.
Athena is confident the company can fulfill its promise. They plan to begin by targeting areas with an existing high level of knowledge about cryptocurrency, then expand into other parts of the country as they gain experience using the technology.
ATMs, which are essentially bank machines, will enable people to buy and sell cryptocurrency using their credit or debit cards. To do this, the ATM will ask for the user's ID number as well as a six-digit code which serves to confirm their identity.
Crypto Accounts for Less Than 2% of Remittances
Remittances are a significant source of economic growth in many countries, especially low and middle income ones such as El Salvador. Furthermore, these remittances often provide much-needed assistance to those living in poverty.
But for many people, remittances remain cash-based. This is particularly true in developing countries where remittances often go towards covering basic necessities like food and healthcare - according to surveys.
Cryptocurrency accounts offer a convenient option for those living in developing nations to send remittances, however they cannot replace traditional cash transfers. They're more complex to set up and convert than their traditional counterparts, plus they lack reliability or security. Furthermore, cryptocurrency can be volatile and difficult to store or transfer if not kept in the correct currency.
However, several digital currency payment apps are now enabling the adoption of crypto remittances worldwide, such as Chivo wallet and Strike. These services use Lightning Network technology to deliver instant payments, significantly reducing remittance fees in the process.
These companies also enable users to set up automated remittances, helping reduce fraud risks and enhance security. These solutions are becoming increasingly popular among those living in developing nations, contributing to financial inclusion efforts.
Another advantage of crypto accounts for remittances is that they allow recipients to pay taxes and exchange without needing to convert their coins back into fiat currency. This is especially helpful in developing countries, where traditional banks and exchanges may not be readily accessible.
Crypto accounts can also serve to increase government revenues. They can be utilized for tax contributions and deposited to the Central Bank of El Salvador before being converted into a local currency.
Crypto should become a viable remittance alternative by educating its users about its operation and advantages over traditional currencies. Doing this will guarantee everyone understands its risks and potential advantages, so they can make an informed decision.
Remittances can be the only way for some people to send money home. For others, they serve as a form of savings that enables them to purchase goods and services from abroad.
Remittances have a long road ahead of them and are unlikely to be replaced by cryptocurrencies anytime soon. In fact, the number of remittances is expected to grow much slower than other forms of economic expansion in the coming years.
Though the country's BTC Adoption Plan has failed, there are some positives to take away from it. For one, it has helped attract more tourists, which in turn have fuelled the tourism industry which has grown 30% since bitcoin law took effect.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.