El Salvador: One Small Step For Bitcoin
This article originally appeared in Bitcoin Magazine’s El Salvador print issue. You can purchase the full issue here.
“Are you guys ready for this?” Jack Mallers asks the thousands of Bitcoin enthusiasts crowding the main hall of Bitcoin 2021. The 27-year-old Strike CEO paces back and forth on stage with the swagger of a hip hop artist, as he accepts the cheers from the crowd.
“Rhetorical question, there’s no fucking way. There’s no way, I promise you,” Mallers continues. He is one of the last speakers at the conference in Miami, but he knows how to revive the energy in the room. “One small step for Bitcoin, one giant step for mankind, I promise.”
Sporting his signature hoodie and baseball cap, Mallers explains that he has just returned from El Salvador — the Central American country perhaps best known for its high crime rates and corrupt officials — in the context of a new pilot program for Strike. A staggering 20% of El Salvador’s gross domestic product (GDP) consists of money sent home from family and friends in countries like the United States, which potentially makes the country a fertile market for remittances over Bitcoin.
But while in El Salvador, Mallers ended up doing a lot more than work on Strike’s pilot program. In his talk, the young CEO reveals that he ended up collaborating with the then 39-year-old president Nayib Bukele and his administration to launch one of the most ambitious experiments in the history of Bitcoin.
Mallers’ talk, the audience would soon find out, serves as an introduction for a video message from the president himself. In a short recording, Bukele announces that he will propose a bill to make bitcoin a legal tender in El Salvador.
Jumping up from their seats on hearing the news, the crowd’s applause and cheers drown out Bukele’s last sentences in the video. With Mallers breaking out in tears on stage, everyone in the room recognizes that history is being made, right then and there, at a Bitcoin conference.
Mallers was right. The thousands of Bitcoin enthusiasts were not ready for what he was about to announce. But as it would soon turn out, neither was El Salvador as a whole.
The announcement at Bitcoin 2021 was an incredible surprise for every Bitcoin enthusiast in the room and around the world. But it was an equally big surprise for the citizens of El Salvador. Their president had just promised to declare a second legal tender for their country, to be added to their existing national currency, the U.S. dollar. It was a currency, moreover, that most knew very little about. The introduction of bitcoin as legal tender had never been seriously discussed in El Salvador.
Earlier that year, Bukele’s political party, Nuevas Ideas (“new ideas”), had won a supermajority in parliament. The popular president had already used this to dismantle El Salvador’s supreme court after his far-reaching pandemic response was ruled unconstitutional, replacing the sitting judges for alternatives that would follow his bidding. Even before that, he had sent the army into the parliamentary building in what can only be described as an intimidation campaign.
Given Bukele’s unwillingness to take no for an answer, it was hardly a surprise that his Bitcoin proposal was accepted by the national parliament just a few days after his Bitcoin 2021 announcement. Members of his own party certainly weren’t going to vote against the new law — radical as it may have seemed to some of them.
While the bill was making its way through the Salvadoran parliament, Bukele joined an English-speaking livestream on Twitter to discuss how the digital currency could help his country. In it, he would, seemingly on the fly, come up with additional ideas, like using geothermal energy from the country’s volcanoes to mine bitcoin.
But where Bukele had, up until then, been successful in reaching the general public directly through social media (journalists in the country were usually critical of his politics), many Salvadorans now started to feel like their president had betrayed them. The poorer segments of the population in particular were concerned that Bukele’s embrace of bitcoin represented a turn away from them and toward a more international and wealthy community of tech entrepreneurs and investors.
According to a survey by pollster Disruptiva in collaboration with San Salvador’s Francisco Gavidia University, conducted a few weeks after the Bitcoin 2021 announcement, over half of El Salvador’s population (54%) strongly rejected the new law, while another 24% had an overall negative view of it. Less than a fifth (19%) welcomed the Bitcoin law. The remaining 3% was undecided. Introducing bitcoin as legal tender was the most unpopular act of Bukele’s presidency so far.
Part of this may have been due to the overall negative press coverage about Bitcoin in Salvadoran media. This is, of course, not unique to El Salvador; mainstream media all across the world seems to have a tendency to focus on Bitcoin’s negatives (whether real or perceived). Besides the Four Horsemen of the Infocalypse — terrorists, drug dealers, pedophiles and organized crime — Bitcoin’s energy use has become a sticking topic, its scalability is often described as a dead end, and here and there an op-ed will still show up suggesting that Bitcoin is a Ponzi or pyramid scheme.
But part of the concerns were more grounded. They had everything to do with the implementation and rollout of a new law, one that appeared was coming just as fast as it could be conceived.
El Salvador’s Bitcoin story had begun years earlier, in El Zonte, a small coastal town with volcano black beaches, dirt roads and friendly stray dogs. Its warm sea water and perpetual waves had made it an attractive destination for international surfers.
Mike Peterson was one of them. Almost two decades ago, the then 29-year-old food stand business operator from San Diego visited El Zonte on a surfing trip. But where most American visitors returned home after their holiday to plan a next trip to the beaches of Hawaii or Costa Rica, Peterson fell in love with the small beach town and would come back to spend increasingly bigger chunks of the year there, until moving to El Zonte semi-permanently in 2013. (Peterson still returns to the U.S. periodically to run his business, especially in the summer’s festival season.)
As a resident, Peterson became more invested in El Zonte’s future and in the local community. He learned that many kids in El Salvador grew up without a father, as adult men often joined one of the gangs in the country, ended up in prison, or left altogether in search for a better life in the United States. When their sons reached a certain age, they’d often end up doing the same.
Peterson eventually met local surfer Jorge Valenzuela, who had a vision to break this cycle. Together with Valenzuela’s friends Roman “Chimbera” Martinez and Hirvin Palma, they started putting together programs like “Surf para todos,” where El Zonte’s youth could get surf lessons and become part of a community that would give them a sense of purpose. The projects centered around a small building in the village that Valenzuela had purchased, dubbed the “Hope House.”
Peterson, Valenzuela, Chimbera and Palma were, for some time, running their grassroots initiatives with occasional small donations. They didn’t have much funding but made up for that with their passion and time.
Then, the representative of a wealthy bitcoin investor contacted Peterson.
The investor — who to this day remains anonymous — wanted to redirect some of his newfound bitcoin wealth toward nonprofits. But, importantly, he didn’t just want these nonprofits to simply cash out the coins for fiat currency. He wanted the bitcoin to actually be used. For most of the nonprofits that he approached, this sounded like too much of a hassle.
But not for Peterson. Although he was not actively involved with the international Bitcoin community — he was not on Twitter or Reddit or a frequent visitor of Bitcoin conferences — Peterson was an Ayn Rand–inspired, free market libertarian, which had gotten him interested in the digital currency. Where other nonprofits didn’t feel like dealing with bitcoin’s volatility, for Peterson, the idea sounded like a dream come true.
Peterson and the team worked out a plan detailing how they would use the peer-to-peer electronic cash to bootstrap a local bitcoin economy, consisting of two main legs. First, the bitcoin would be used to pay local youth for tasks that would benefit the community: They’d clean up the river, repair roads or serve as lifeguards. And two, Peterson and his team would convince store owners and restaurants in town to accept the digital currency.
The anonymous investor was sold on the idea, and in the summer of 2019, the initiative around the Hope House received a sizable amount of bitcoin. (The exact amount has not been made public.) As the Bitcoin project got underway, El Zonte was dubbed “Bitcoin Beach.” Longer term, Peterson hoped that the surf town would attract “Bitcoin tourists” to come and spend their coins, so the Bitcoin project wouldn’t rely on the donated money as much.
The project was successful, though initially also very small. Valenzuela’s own mom participated with her roadside restaurant “Mama Rosa,” where she sold pupusas (El Salvador’s national dish) and other meals for bitcoin. A local hairdresser also agreed to accept the digital currency, as did a handful of small shops and restaurants in town. But it was not yet very widespread.
When the COVID-19 pandemic broke out, the Bitcoin Beach project pivoted its goal. With tourism in the town slowing to a crawl, many people in El Zonte saw their income fall to unsustainable levels. To help them out, the Hope House project rolled out something of a basic income scheme: Each household was gifted $30 worth of bitcoin per month, no strings attached.
This, in turn, offered a much stronger incentive for more local stores and restaurants to add bitcoin as a payment option: It was often the only currency that people had available to spend, so merchants that didn’t accept the cryptocurrency were losing customers. Over the span of a year, a lot more local establishments in El Zonte decided to accept bitcoin payments.
As they became more accustomed to using bitcoin, locals also increasingly came to appreciate the currency’s benefits. Many didn’t have a bank account, so they could, for the first time, make electronic payments and transact with each other across distances through their phones. Moreover, some started to set aside some satoshis (sats) for savings: Peterson and his fellow project leaders witnessed how people in town adopted a more long-term view when it came to their (modest) finances.
The project also started to attract interest from abroad. On invitation of Peterson, “What Bitcoin Did” podcast host Peter McCormack paid a visit to the town, helping spread the word about the initiative. Galoy cofounder Nicolas Burtey came down to develop the Bitcoin Beach app, making it easier for locals to use bitcoin over Lightning and off-chain. When Cash App developer Miles Suter visited El Zonte, he even helped establish a bitcoin sponsorship for the national surf team.
And, of course, Mallers came down to El Zonte as well. With his help, many merchants added Strike to their Bitcoin toolkit, giving them the option to easily convert received bitcoin into dollar balances, while also opening up a new corridor for international remittances.
What’s more, Strike rapidly gained popularity in other parts of the country as well. Before long, it was one of the most downloaded apps in all of El Salvador, which in turn served as the inspiration for the Bukele administration to try and replicate the Bitcoin Beach model on a grander scale.
But the government’s approach would be a bit different.
In El Zonte, the Bitcoin Beach project was bootstrapped with bitcoin from an anonymous donor. Volunteer work from Peterson, Valenzuela, Chimbera and Palma helped generate interest among local youth and merchants, who gladly choose to accept the digital currency for payment. Economic incentives did the rest.
But in exporting Bitcoin Beach’s success to the rest of the country, the Bukele administration opted for an alternative approach. To help make bitcoin a success in El Salvador, they decided that accepting bitcoin would be mandatory.
As outlined in Article 7 of the Bitcoin law:
“Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
When a money is legal tender, it usually means that it is, by law, the currency that can be used to settle debts. But it does not mean that regular merchants are required to accept payment in that currency in the first place. (Case in point: In most U.S. states, it’s possible to open a store that only accepts bitcoin, even though the U.S. dollar is the legal tender.)
On top of making bitcoin legal tender, Bukele’s Bitcoin law made bitcoin a compulsory tender. While many Bitcoiners did celebrate Bukele’s move, this compulsory aspect was rejected by others, who believe that people should be free to choose which money to use. They tend to favor the abolishment of legal tender laws, because such laws skew the playing field in favor of some currencies. Compulsory tender laws skew the playing field even more.
To be sure, there are provisions in the law that offer an out from the compulsory effects of Article 7. Article 12 of the law offers an exemption for Salvadorans who “by evident and notorious fact” don’t have access to the technologies to accept bitcoin transactions, while Article 8 promises that merchants can have incoming bitcoin payments converted to U.S. dollars automatically and at no cost.
But these provisions, in turn, introduced new downsides.
For one, it’s not very well specified what “by evident and notorious fact” means. It presumably means that the many fruit and vegetable stands set up next to the roads in El Salvador won’t be required to accept bitcoin. But does it also include that nail salon in San Miguel whose elderly owner has trouble understanding the difference between email and WhatsApp — never mind the difference between a Bitcoin address and private key? Does it include that pizzeria in El Tunco which has so far rejected all electronic payment systems in favor of physical cash?
A perhaps more important escape from the mandatory part of the law is offered by Article 8, which promises that merchants can convert bitcoin payments into U.S. dollars automatically and at no cost. The Salvadoran government can make this guarantee because it established a $150 million trust fund to immediately buy up any bitcoin that merchants wish to exchange for dollars.
It’s not clear how exactly this would work behind the screens, however. Even if the government sells the bitcoin they receive (which they almost certainly would have to do in order to keep offering dollars in exchange for new bitcoin), there has to be a cost involved in exchanging and moving money. In economic terms: friction. Rather than currency conversion being truly free, it would be subsidized by the Salvadoran taxpayer.
Additionally, to enable the instant and free conversion, the government would develop its own wallet and merchant solution: the Chivo app, modeled after Strike. (“Chivo” means “goat” but is slang for “cool.”) It’s not really clear how much was paid for the development of this app, however, in the same way that it’s not really clear who developed it.
These costs, as well as the lack of clarity and transparency around it all, was emphasized by Bukele’s political opponents. Since the Bitcoin law was unpopular from the start, they finally saw an opportunity to chip away at the president’s popularity and win back some support from the general population.
It resulted in the digital currency becoming highly politicized over the weeks and months after the Bitcoin 2021 announcement. Bukele’s opposition now had a single flag to unite under at their street protests, with “No al Bitcoin” (“No to Bitcoin”) becoming their rally cry.
In a way, and in an ironic twist of faith, those Bitcoin enthusiasts ascribing to freedom of choice in currency found themselves aligned with the Salvadorans taking the streets to protest the new law in anti-Bitcoin t-shirts. The first group rejected Article 7 on philosophical grounds. The second group protested the negative downstream effects that came from the same article.
And then there was the institutional opposition.
With Bukele’s decision to introduce bitcoin as a legal tender in all of El Salvador, the success of a small beach town on a Central American coast escalated almost overnight to attract attention from major international institutions. And these institutions didn’t seem to be very happy with the development.
The World Bank, the international financial institution tasked with the reduction of global poverty, was quick to reject a request from the Salvadoran government to help implement bitcoin on a technical level. The lender cited concerns about transparency (recall the Four Horsemen) and the energy use of mining.
Moreover, all of this happened while the Bukele administration was in talks with the International Monetary Fund (IMF) about a $1 billion dollar financing agreement. The new Bitcoin law seemed to ruffle some feathers with this institution as well. Days after the Bitcoin 2021 announcement, the IMF made it clear that they saw both economic and legal issues with the move.
In late July 2021 — about six weeks after the announcement of the law — the IMF followed up with a blog post titled “Cryptoassets as National Currency? A Step Too Far.” Although the text did not mention El Salvador specifically, the content and timing of the article made it obvious enough which country the authors had in mind when they wrote it.
The blog post argued that (a currency like) bitcoin was unsuited as a national currency. However, it probably convinced few adherents of the peer-to-peer digital cash system. Rather, it laid bare the fundamental differences in perspectives between Bretton Woods–era institutions like the IMF and the World Bank and the alternative monetary economic views that Bitcoin represents.
“The most direct cost of widespread adoption of a cryptoasset such as Bitcoin is to macroeconomic stability,” the blog post contended. “If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.”
Where some Bitcoiners were critical of the Bitcoin law because it impeded on the freedom of choice in currency, the IMF’s objection appeared to be the polar opposite of that. Instead of embracing the market’s ability to select the best type of money, the IMF, in contrast, appeared to argue that freedom of choice only leads to a waste of time and resources.
But perhaps even more importantly, from the perspective of many Bitcoiners, the IMF had it upside down. It is exactly because fiat money doesn’t act as a good store of value that many people today have to spend significant time and resources figuring out how to preserve their wealth, be it by investing in real estate, stocks, bonds or other assets. In a hyperbitcoinized world, people could instead simply store the fruits of their labor in this hard money.
Similarly, the IMF blog argued that “monetary policy would lose bite” if central banks can’t manipulate interest rates. Many Bitcoiners would actually consider this a good thing, however; they believe that central banks’ monetary policy has harmful effects on the economy, as it makes it harder for people to make economic calculations.
But on top of that, and perhaps more importantly, this argument doesn’t seem to apply to El Salvador in the first place. With the U.S. dollar, the country was using the currency of another country. As such, the Central Reserve Bank of El Salvador already couldn’t make its own monetary policy.
This inability to control its own monetary future was, in fact, one of the arguments in favor of Bukele’s Bitcoin move.
Opposition to the law seemed to come from all different sides. Domestically, Bukele’s opposition emphasized the costs and lack of transparency involved with the new law. Internationally, some of the most powerful institutions rejected the move for monetary economic reasons. And on the other end of the spectrum, some Bitcoiners didn’t like the implementation of the law because they preferred the abolishment of legal tender laws altogether and considered a mandatory tender law to be even worse.
But Bukele made it clear: The Bitcoin law, including Article 7, would not be stopped.
Skeptics of the president believe that he pushed through because he wanted to bolster his image as a young, hip and tech-savvy president. Bukele often wears a backward baseball cap in public appearances, he dunks on political opponents via memes on social media and, at one point, he took a selfie on stage at the United Nations. Embracing Bitcoin perfectly fits that persona, his critics assert, while distracting from his authoritarian tendencies.
Maybe the critics are right to some extent. But Bukele does seem to have a real understanding of Bitcoin, and he is capable of explaining some of the potential benefits for El Salvador as well.
The first and perhaps most obvious benefit was already touched on: Bitcoin has the potential to help cut down remittance fees. Lightning transactions can currently cost less than a cent and sending bitcoin from the U.S. to El Salvador, of course, has no additional cost. With companies like Western Union often charging at least $10 just to conduct the transfer, conventional remittance fees are incredibly expensive by comparison.
To be fair, Bitcoin’s cost-benefit holds up best if the recipient of the transfer is happy to actually receive (and hold) bitcoin. As detractors of Bukele’s Bitcoin plans like Johns Hopkins economist Steve Hanke point out, the costs of remittance via bitcoin are considerably higher if the recipient wants to convert the coins to cash dollars, due to all the friction involved in that conversion.
Yes, when using the Chivo wallet or the similarly branded Chivo ATMs in the country, this conversion is free. But as mentioned, this really just means that the cost of friction is subsidized by the government, or more accurately, paid for by taxpayers. Perhaps there is a net benefit for the country as a whole if these types of remittances were to disrupt Western Union, but this is not as obvious, and if it is the case, the government did not detail how or why.
A second, and perhaps clearer benefit could be witnessed in El Zonte: Bitcoin can help financial inclusion. About 70% of the people in El Salvador do not have access to electronic payments at all; the cost of onboarding poorer parts of the population is often not worth it for a commercial bank. By extension, many Salvadorans cannot store their savings in financial assets.
Bitcoin, in contrast, is open and free to anyone. This offers millions of Salvadorans the option to pay with their phones or to invest some of their savings in a currency with a fixed supply. They can do so, moreover, without having to rely on a third party and (if they take care) without sacrificing their privacy.
Third, the Bitcoin law could help improve El Salvador’s image and attract people, companies and investments from abroad. This could be in the form of Bitcoin tourists, like those that Peterson hoped to attract to Bitcoin Beach, who quite literally want to visit El Salvador to spend their sats. A favorable tax regime — no capital gains tax on bitcoin holdings — may also seduce some of the crypto rich to choose the Central American nation as their new home. (This incentive is bolstered by Bukele offering permanent residency to anyone who invests at least three bitcoin in the country.) Similarly, a clear regulatory framework could induce international Bitcoin businesses to open offices in the country, creating job opportunities.
Yet, perhaps the single biggest long-term advantage of adopting bitcoin as a national currency is that it could decrease El Salvador’s dependency on the U.S. dollar and, therefore, its dependency on the Federal Reserve and its monetary policy. Monetary expansion devalues the U.S. dollar, but unlike (some) Americans and the American government, El Salvador often does not benefit from the Fed’s monetary expansion at all.
The problematic nature of this dependency became especially clear during the COVID-19 pandemic. Although the Salvadoran government and the Salvadoran people use the U.S. dollar to transact and save, only American citizens received U.S. dollar stimulus checks, and only the American government could easily tap into the supply of newly created dollars to bail out failing industries. In what can be considered quite a perverse monetary dynamic, one of the poorest economies in the world was essentially paying for one of the richest.
And Bukele seemed well aware. As the initial draft of the Bitcoin law, presented by Mallers at Bitcoin 2021, read:
“Central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador,” and “in order to mitigate the negative impact from central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria.”
Bitcoin could offer a way out.
Bitcoin could offer a way out, but even Bitcoin’s biggest fans have to admit that switching from the U.S. dollar to bitcoin is easier said than done. The value of the cryptocurrency is still highly volatile, making it challenging to use for day-to-day commerce, particularly for people living paycheck to paycheck. On top of that, the digital currency is, for many, still confusing and difficult to use.
To help resolve some of these issues (and because accepting bitcoin payments would be mandatory), the Bukele administration developed the Chivo app, which would allow for instant and free conversion between bitcoin and U.S. dollars.
But with only three months between the approval of the Bitcoin law and the law going into effect, the software had to be developed in record time. And it showed.
The Salvadoran government did release the Chivo app on the day that bitcoin became legal tender, September 7, and, on the face of it, it had all the promised functionality. The wallet supported sending and receiving transactions, both on-chain and over Lightning. It was possible to convert BTC to USD and back, commission free. And, to offer an incentive for Salvadorans to actually download the app, a free $30 of bitcoin was included upon registration.
However, actually downloading the Chivo app initially proved challenging. Shortly after the app’s release, Chivo servers couldn’t handle the demand, and the wallet was quickly removed from app stores. When it reappeared, its functionality was far from perfect. The wallet was slow, regularly crashed and, even if it didn’t crash altogether, it was sometimes impossible to make transactions. Perhaps in part because of this, many stores and restaurants simply ignored Article 7 and did not accept bitcoin at all.
The free $30, moreover, could exclusively be spent to other Chivo applications at first. Only after the funds changed wallets once was it free to spend to other bitcoin wallets or a Chivo ATM. This was presumably to stimulate Salvadorans to actually spend the bitcoin somewhere rather than immediately cash the funds out as dollars at the closest ATM.
But in practice, the restriction mostly just led to frustration and disappointment. Salvadorans who tried to spend their funds at merchants that had managed to be bitcoin-ready on day one discovered that they couldn’t, because these merchants were using alternative payment processors. These merchants, in turn, were annoyed that they couldn’t accept the payments, while they had gone the extra mile to be ready from the get-go.
Nor did the initial restriction really seem to achieve its goal. When Salvadorans across the country learned how to unlock the free $30 from their Chivo app (by simply sending it back and forth to a friend or family member), it resulted in long lines at the Chivo ATMs after all. Indeed, many people just didn’t want bitcoin; they wanted to exchange their free $30 for dollar bills.
Although not very surprising, the Chivo wallet was also fully custodial. Users could not hold their own keys, meaning they really did not hold their own coins. The bitcoin balance on their phone was arguably not a bitcoin balance at all, but a bitcoin IOU: Chivo users were trusting the Salvadoran government and/or whoever controlled the Chivo wallet with their funds and with their privacy.
The Chivo ATMs generally did work, but sometimes offered precarious service as well. They did not support Lightning, the user experience could be confusing, and some of them ran out of cash quickly. But more importantly, a number of users reported sending bitcoin to the machines without getting cash in exchange. (At the time of writing this article, some of these issues were resolved but not all of them were.)
In the end, the best experiences were had by those that didn’t rely on (or interact with) the Chivo wallet at all. To just about everyone’s surprise, some of the biggest restaurant chains of the country — McDonald’s, Pizza Hut, Starbucks — were among those that were accepting bitcoin payments on September 7, using payment processing systems from OpenNode or IBEX. Anyone who walked into these establishments with a conventional Lightning wallet had a smooth experience paying for their food or drinks.
The fact that multinationals with global name recognition were now accepting payments in the digital currency drew international attention to El Salvador and received praise from Bitcoiners around the globe — but it was not thanks to Chivo. Where some Bitcoiners believe money is best left to the free market for philosophical and economic reasons, the botched rollout of the government’s Bitcoin infrastructure appeared to confirm the same.
September 7 (And Beyond)
For a few days around September 7, the whole world seemed to be watching El Salvador, with Bukele himself taking center stage. In between purging a large part of the country’s judicial branch, and “his” Supreme Court apparently defying the constitution to rule that he could run for a second term in 2024, the young president was offering IT support for the Chivo wallet on Twitter, while announcing that the government of El Salvador had bought a few hundred bitcoin.
Meanwhile, the growing “No al Bitcoin” protests attracted attention from media in El Salvador and abroad, with a burned down Chivo ATM booth offering juicy imagery. The arrest of hacker and activist Mario Gomez, who’s been particularly critical of the development of the Chivo app, only appeared to further confirm Bukele’s authoritarian tendencies.
But it was undeniably a big day for Bitcoin. Although Bukele did not abolish legal tender laws like some Bitcoiners would prefer, he did create an equal playing field between bitcoin and the U.S. dollar: With bitcoin now being a legal tender, Salvadorans can pay their taxes in bitcoin, and they won’t have to pay capital gains tax on their bitcoin holdings. They can really use bitcoin as money.
Bitcoin itself, of course, continues to operate unfazed by the law, the Chivo hiccups or the protests. The Lightning Network works better every day; Bitcoin startups are offering services in El Salvador that actually work; and, while many businesses do ignore Article 7, there are quite a few establishments that do accept the digital currency as payment as well.
Whatever happens next, the rest of the world will continue to be watching. Already, Cuba’s government said it will recognize and regulate cryptocurrencies for payments on the Caribbean island; a bill was introduced in Panama to provide legal, regulatory and fiscal certainty to use crypto assets; and a lawmaker in Paraguay is leading a bid to legislate bitcoin. If the Bitcoin move in El Salvador turns out to be a success, other dollarized countries like Ecuador, Zimbabwe and Guam would be obvious candidates to consider a similar move.
The rollout of the Bitcoin law was rushed, flawed and controversial. But Bitcoin’s story in El Salvador did not end on September 7. Rather, it marked the messy start of a new and interesting chapter.
Back In Bitcoin Beach
It’s a few weeks after the law has come into effect, in one of El Zonte’s pupuserias with corrugated iron walls, when a 20-something guy with a buttoned down shirt and backward Ripcurl cap pulls out his phone. “Pagar con bitcoin?” he asks in his best Spanish. The man behind the teller points to a QR code pasted to the folding table in front of him: “Si.”
After a day of surfing and enjoying the beach, the young American is ready to pay. But when he tries to scan the black-and-white scattered square code, his phone returns an error message. The Bitcoin Beach wallet of the pupuseria appears to be incompatible.
But the surfer is lucky. One of the kids who works at the Hope House is around and is happy to give him a quick course in Bitcoin, Lightning and the Bitcoin Beach wallet’s shared custody solution. The surfer pays close attention as he moves his fingers over his phone screen to download a new app.
The surfer’s friend, standing next to him in line, is not interested, however. He turns around to join a blonde girl waiting outside. “They’re telling him that he needs to move his funds to a different wallet first, or something,” he explains to her, annoyed. “Apparently, there are special wallets that you need if you want to make cheaper transactions, I don’t know.”
A couple minutes go by, until the guy with the buttoned down shirt walks out of the pupuseria with a gleeful smile. “I just made my first bitcoin transaction,” he tells his friends. “Yes,” the blonde girl answers, competently hiding the skeptical account their friend just shared, as the three of them start walking down the sandy road, back toward their seaside hostel. “Historic!”
It required some puzzling, but the surfer in El Zonte managed to pay with peer-to-peer cash. Not because the pupuseria was mandated to accept it; it had been doing so for over a year. Probably not because it was the only option either; the surfer likely had dollars on hand as well. And definitely not because it was more convenient. He had paid with bitcoin simply because that was his currency of choice, and the pupuseria was glad to accept it.
If they can look past the politics, the questionable implications of Article 7 and the botched launch; if they are willing to work through Bitcoin’s kinks, complexities and inconveniences like the surfer in El Zonte had; if they gain experience with using bitcoin for remittances or explore how the digital currency can help them financially or otherwise, the people of El Salvador can, in the years ahead, still prove the blonde girl more right that she had probably realized.
El Salvador’s Bitcoin story could prove to be historic.