On the 7th of September, 2021 El Salvador became the first country to accept bitcoin as legal tender. The crypto could be used for all sorts of transactions in the country from buying some ice cream to paying your taxes. The brave adaptation idea was made clear by president Nayib Bukele, when he said he would be passing congress a bill that made bitcoin a legal tender in the country at the 2021 Bitcoin conference in Miami.
El Salvador had bought 400 bitcoin worth about $20.9 million, a day before it formally adopted the currency legal tender. The government also released the Chivo digital wallet on Tuesday, which allows users to perform bitcoin transactions after signing up. The reasoning behind this move is still skeptical for world governments.
According to president Bukele, the use of cryptocurrency is going to boost the country’s crippling economy. 70% of the population is unbanked and around 23% of the country’s GDP is from foreign remittances. Bitcoin was adapted to overcome this reducing the need for banks, improve accessibility and attract investments to the country. However, the country that abandoned its currency for the US dollar in 2001, was declined by the world bank.
This was based on bitcoin lacking transaction transparency and concerns for its market value. The price of a commodity up for sale will remain the same regardless of the bitcoin value. This has led to a vast number of people going against the present implementation of the currency.
History of Bitcoin in El Salvador
Bitcoin isn’t something entirely new for the Latin American nation. Bukele had been tinkering with the cryptocurrency even before winning office in 2019. The lack of banking knowledge in the country means people had to rely mostly on cash. He’s also had plans for facilities and bitcoin mines that would add to such an economy in the country. The president himself has had experience with bitcoin and has assessed its potential benefits.
Although a very small percentage of the population was aware of blockchain-based technology, El Zonte, a surfing village on the country’s pacific coast has been experimenting with it since 2019. Michael Peterson, an American who used to take family vacations to the coast from 2006, came to be the founder of the so-called Bitcoin Beach. Peterson was involved in the community’s activities and eventually started taking an interest in the economy by opening up guesthouses along the coast.
The nation’s lack of banking capable citizens and bitcoins ‘store value’ was what prompted Peterson to start experimenting with bitcoin and the public’s reaction to it. A while after it had commenced, an anonymous American donor took interest in the project and started seeding the village.
Although Peterson hadn’t talked to the donor in person, they’ve interacted with each other through a manager and shared similar interests to promote the growth of the village. This inspired Peterson to fully ‘Bitcoinzone’ the village and promote the various advantages of using cryptocurrencies for making purchases.
The residents of Bitcoin Beach use the Strike app, the ATM, and peer-to-peer transactions to move money around and this seems to work fine for the most part.
The Government Implementation of Bitcoin
The nation has partnered with Strike, a payments application developed by Zap Solutions, to develop the bitcoin infrastructure for the nation. The government has developed its own application Chivo, that allows users to send, receive and pay for transactions with bitcoin easily.
The application also promised users $30 worth of bitcoin in their wallet to promote its use. This was however suspended later on since the large number of transactions done by the users forced Chivo to go offline due to server overload. However, the president has promised that this issue will be resolved soon.
Cities that previously had no banks have been provided with a Bitcoin ATM that can be used with their accounts to withdraw funds as cash. Payments have been simplified as most people have a smartphone and signing up just requires a government ID and does not require the user to have a bank account.
The public opinion regarding the matter has been mixed. Some seem to embrace the technology and think that it's the future of El Salvador while others resort to protests asking the government to withdraw their decision.
“I prefer having my hard-earned money on me, it gives me a sense of satisfaction and assurance”, said one of the shopkeepers when asked about the change. Any change indeed requires some time to get used to or rather people need time to understand its benefits. The same goes for Bitcoin.
For some poor Latin Americans, the change has been drastic and people have made small profits using the currency. Payments are easier and require much less effort compared to traditional means. This however does not patch up the volatile nature of bitcoin. It’s safe to say the value is unlikely to ever hit zero but the massive crash that occurred on Tuesday has spooked many citizens and left others concerned.
The Bitcoin Crash and Why it Happened?
As the nation was ready to move ahead with its adaptation of Bitcoin, on Tuesday morning the market had a massive crash, bringing the value down by 17%. Investors and market analysts may have predicted this drop well before it happened due to the president's tweets, which expressed his idea for the legal tender.
A large number of users performed transactions using Chivo, the government-made app on the day that bitcoin was implemented. Several users had converted almost all their money to Bitcoin in order to carry out payments and try out the new system.
The wallet temporarily crashed due to server overload and this has been the reason for the drop in bitcoin value. The citizens were provided with multiple ways to transact but the masses had relied on Chivo. The price had dropped to around $43,100 from $52,457 earlier that day. The market is now stabilizing at $45,935.
Experts say that this could possibly happen again as more users are starting to adopt bitcoin as their daily money. The use of any cryptocurrency as the general means of spending money can lead to the downfall of a nation’s economy.
The protests continue in El Salvador while people who like the idea of a change have decided to learn more about it. Some have even become self-learned brokers using the volatile nature of Bitcoin to their advantage. The current state of things can only be looked at from an experimental perspective as of now.
Is the implementation of Bitcoin going to be the downfall of an already economically struggling nation? It's something we’ll have to wait and observe. The democracy has chosen this on their own and it's safe to say they’ve done their research before doing so. The risks of such an economy are very real but as its citizens have commented so are the benefits.
Bitcoin could be what empowers a nation that largely relies on remittances. The citizens are becoming more aware of the change and this could bring new opportunities to them, leading to a more developed and stable economy for the future El Salvadorians.
When did El Salvador adopt bitcoin?
The people in El Zonte, El Salvador started adopting Bitcoin in 2018 through the development of Bitcoin Beach.
How much bitcoin did El Salvador buy?
El Salvador acquired roughly $21 million worth of bitcoin, President Nayib Bukele announced.
Is bitcoin legal tender in El Salvador?
Yes, Bitcoin became legal tender in El Salvador on 7 September 2021, and El Salvador is the first country to have bitcoin as legal tender.
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