Starting Tuesday, bitcoin is an official national currency in El Salvador, along with U.S. dollars.
To use the cryptocurrency, Salvadorans need to download an electronic wallet. If they use the government-sanctioned wallet, they’ll get $30 worth of bitcoin to use. Stores have to accept bitcoin, provided they have internet access and can do so. They’ll still take American dollars. In the past six months, the value of a bitcoin has fluctuated by as much as $30,000. So a lot could go wrong.
We asked George Selgin, who directs the Center for Monetary and Financial Alternatives at the Cato Institute, what’s behind President Nayib Bukele’s decision to embrace bitcoin. The following is an edited transcript of our conversation.
George Selgin: I think he’s quite sincere. I think he qualifies as a bitcoin [maximalist], and so they would like to see the whole world using bitcoin. So to that extent, his effort is consistent, I believe, with his ideals. But I think it’s also the case that his doing this is very much a way of appealing to the younger voters of El Salvador who, incidentally, aren’t necessarily the ones who will be having to take bitcoin in business, because they’re not running businesses. But I think that it’s really a philosophical or ideological move, and not entirely a cynical one. However, I have grave doubts that it will make Salvadorans better off, because for all the hype around it and all of its popularity, bitcoin is not a very good medium of exchange. That’s why most people, they don’t use it for that purpose. It’s popular enough as an investment vehicle, although a very risky one, but it hasn’t taken off for most kinds of transactions. Remittances from abroad are the main exception, but even there, its use is small compared to that of other remittance vehicles.
Jed Kim: Can you explain remittances and its arguments for bitcoin adoption?
Selgin: Well, remittances are just transfers of money from one country to another, and they can be very expensive. Part of that is exchange rate fees. But it’s also because of lack of coordination of different governments. And so you have a whole bunch of different transactions between banks in one country, and then in another country. In each stage, the banks take a little cut of the action. Those fees have been falling a lot for more conventional remittances, but bitcoin, with the right sorts of supplementary software, can be a very competitive way of sending remittances, so it does have that advantage. I don’t think, though, that the bitcoin law really is relevant here, because it doesn’t cheapen the remittances itself. What it does do is to allow people who receive bitcoin from abroad in El Salvador to directly spend it on stuff instead of having to get dollars and then spend it. That is the main difference that would make. But polls suggest that most people would rather just get dollars remitted to them and spend those.
Kim: Bitcoin is so volatile. How is the country’s central bank preparing for this change and possibly inflation?
Selgin: What they’ve done is they’ve set up a trust fund. They have a trust fund initially worth $150 million, which is really not that much money. And they’ve set up an exchange house. Basically, the merchants can instantly get dollars at the value of the sale. They’re not going to take any risk. But the exchange house is going to assume that risk if the value of bitcoin changes before they can sell the bitcoin they’ve received for dollars. Then if it goes down, the difference comes out of the trust fund. If bitcoin appreciates, then the trust fund will appreciate. The problem is that people are going to be trading bitcoin for dollars more often when they think bitcoin’s going down than when it’s going up.
Kim: How are we going to know if it’s working? What should we be looking out for?
Selgin: Of course, the number of people who sign up to download the official Chivo wallet, that’s going to be a very important indicator. I think we would be looking out for evidence that the download of the app has been high and that the exchange fund is active. And of course, we’ll probably hear about it if they run out of money. I guess they’ll have to put it in another tax bill.
Kim: There was a small surf town in El Salvador that was kind of like a pilot program for this. What can we learn from how that went?
Selgin: First of all, in that setup, it was a voluntary setup entirely. They gave participating people who were willing to accept bitcoin in trade, they gave them some money, I think was a little more than 30 bucks each, and they got a lot of people to sign up, and so bitcoin became more generally accepted. However, it must be said that a lot of people who took part in that experiment have since dropped out. There are plenty of peddlers and smaller dealers, especially, who went back to using dollars, and this despite an inducement that was somewhat more tempting than the 30 bucks. Let’s remember also, that was a private setup, so signing up to it and taking the amount was not equivalent to allowing the government to track every purchase you made. So those merchants who are relying for any reason on the government not knowing about every sale they make have a reason to be more reluctant to sign up for this official nationwide program.
Kim: What does this say about attitudes toward Bitcoin and other cryptocurrencies?
Selgin: It illustrates the fact that there are two worlds here: There’s the world of the bitcoin maxis and enthusiasts. And then there’s the much larger number of people who don’t want to touch the stuff. They don’t want anything to do with it. And this divides the bitcoin community itself, it should be said, because a lot of them are very much against having the government force people to use any money, including the one they happen to like.
Related Links: More insight from Jed Kim
It’s one thing to make bitcoin your national currency, but you’ve got to make sure people can use it. Internet connectivity is going to be critical to that. Reuters found a study from 2020 that says El Salvador had 45% connectivity, giving it the second lowest internet penetration out of 20 countries in Latin America and the Caribbean. It says in rural areas barely 10% of people have internet.
There have been many articles written about El Salvador’s switch to bitcoin and the potential for chaos there. I particularly enjoyed the lede from a Wall Street Journal article a couple of weeks ago. It reads: “In less than two weeks, El Salvador will become the first country to adopt bitcoin as a national currency. No one knows what comes next. One thing that might come next? Running afoul of the IMF, with whom El Salvador is in negotiations for a $1.3 billion financial aid program.”
The bitcoin experiment in El Salvador got started in a small surf town called El Zonte. An anonymous donor plunked down a boatload of money, and pioneers went about setting up a bitcoin economy. If you want to see it in action, you can check out a video Vice put out. Lots of Bitcoin signage all over the place.
And finally, you’ve probably heard that bitcoin is very energy intensive. The New York Times has an article that puts some numbers and graphics to it. Bitcoin uses more electricity than Finland, a nation of 5.5 million people. In 2009, when bitcoin was basically worthless, it took a few seconds of a house’s energy to mine one. Today, it’d take nine years’ worth.
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